Workers joining boards can lead to higher productivity
Published 25/07/2016 | 02:30
Giving board seats to employees familiar with factory floors can help businesses beat the market, sometimes by huge margins.
That's the finding in a Bloomberg review of countries where worker-directors are common, but not required by law. Indexes of companies with employees on their boards in Norway, Sweden and Austria each beat benchmark indexes in those nations by 30pc or more since July 2011.
In Denmark and France, the experiment has gone the other way - companies with worker representatives have underperformed benchmarks by 8pc and 5pc. All the indexes were weighted by market capitalisation.
The practice, widespread in Germany, has been floated in Britain by Prime Minister Theresa May as a way to make corporate capitalism more egalitarian. In Germany, long the European Union's economic workhorse, the DAX Index has returned 9pc during that five-year period as MSCI's Europe index declined 3pc.
"There's higher levels of productivity at these companies, there's no doubt about it," said William Lazonick, co-director of the Centre for Industrial Competitiveness at the University of Massachusetts at Lowell.
While many companies work to narrow communication gaps between departments, fewer are focused on integrating vertically - among boards, executives, managers and employees, he said. Doing so can improve information flows, learning and decision-making, making workers feel more invested, he said.
Still, the practice can be overdone, said Frank A Schmid, who co-authored a paper on Germany's so-called co-determination practices. His research showed that German companies where workers made up half the board's membership traded at a 31pc discount to those where workers accounted for only one- third of seats.
"Employees have a different objective function, and it isn't necessarily to grow shareholder value," Schmid said. He cautioned against looking to Germany, whose businesses have a supervisory board and an executive board, for how the practice would play out elsewhere.
In Norway, workers have the right to nominate directors in companies with 30 or more employees, according to the European Trade Union Institute. An index of 27 businesses with worker representatives on their boards in 2011 beat the 59-member Oslo Stock Exchange benchmark by 45pc during the five-year period.
The worker index had a 15pc lower exposure to energy and a 12pc higher exposure to information technology than the benchmark, which may have expanded the margin during the last year as a crude glut has sent oil prices tumbling.