Theresa May Is Right: Workers on Business Boards Can Help SharesBy
Companies with worker directors outperform peers without them
Austria, Norway, Sweden do better; France and Denmark worse
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 30 percent or more since July 2011.
In Denmark and France, the experiment has gone the other way: Companies with worker representatives have underperformed benchmarks by 8 percent and 5 percent. All the indexes were weighted by market capitalization.
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 9 percent during that five year period as MSCI’s Europe index declined 3 percent.
“There’s higher levels of productivity at these companies, there’s no doubt about it,” said William Lazonick, co-director of the Center 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, and can make workers feel more invested, he said, adding that companies with employee directors are more likely to take this effort seriously.
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 31 percent 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 in the U.K. Companies there have a single board.
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 45 percent during the five-year period.
The worker index had a 15 percent lower exposure to energy and a 12 percent 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. Twenty-two companies appeared on both indexes.
In Sweden, workers can nominate directors in companies with at least 25 employees, ETUI data show. An index of 40 with worker directors beat the 30-company OMX Stockholm index by 35 percent over the period. The worker index has 20 percent less exposure to financials and about 10 percent greater exposure each to the industrial and materials sectors.
In Austria, workers can nominate directors at public companies with at least 300 employees, according to the ETUI. Sixteen with workers on their boards outdid the 20-member Vienna Stock Exchange Austrian Traded Index by 33 percent during the period. The worker index had 35 percent less exposure to financials, 18 percent greater exposure to industrials and 9 percent greater exposure to materials.
The worker index didn’t fare as well in France, where employees have historically been represented only on boards of state-owned and privatized companies. New legislation has increased the number of businesses required to have worker representation in the future, according to the ETUI. Twenty-five such companies underperformed the benchmark CAC 40 Index by 5 percent. The worker index had 19 percent greater exposure to industrials and 11 percent less exposure to consumer staples.
In Denmark, about 65 percent of companies with more than 500 employees had workers on their boards in 2011, according to ETUI. Twenty-six have underperformed the 142-member OMX Copenhagen Index by 8 percent. The two sets of companies were roughly equally weighted by sector.