Finding value in getting workers on board

Giving board seats to employees can sometimes help businesses beat the market.

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 beat benchmark indexes in those nations by 30 per cent 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 per cent and 5 per cent.

The practice, widespread in Germany, has been floated in Britain by Prime Minister Theresa May as a way to make corporate capitalism work in a more egalitarian way.

“There’s higher levels of productivity at these companies, there’s no doubt about it,” says William Lazonick, co-director of the Centre for Industrial Competitiveness at the University of Massachusetts.

While many companies work to narrow communication gaps between departments, fewer are focused on integrating vertically — among boards, executives, managers and employees, he says. Doing so can improve information flows, learning and decision making, and can make workers feel more committed.

Still, the practice can be overdone, says Frank A. Schmid, who coauthored a paper on the German approach to worker representation. He found German companies where workers made up half the board’s membership traded at a 31 per cent discount to those where workers accounted for only one-third of seats.

In Norway, workers have the right to nominate directors in companies with 30 or more employees. An index of 27 businesses with worker representatives on their boards in 2011 beat the 59-member Oslo Stock Exchange benchmark by 45 per cent during the five-year period, though differences between companies in the two groups may have exaggerated the result.

In Sweden, workers can nominate directors in companies with at least 25 employees. An index of 40 with worker directors beat the 30-company OMX Stockholm index by 35 per cent over the five-year period.

In Austria, workers can nominate directors at public companies with at least 300 employees. Sixteen with workers on their boards outdid the 20-member Vienna Stock Exchange Austrian Traded Index by 33 per cent during the period.

The worker index didn’t fare as well in France, where employees have historically been represented only on boards of state-owned and privatised companies. Twenty-five such firms underperformed the benchmark CAC 40 Index by 5 per cent.

In Denmark, about 65 per cent of companies with more than 500 employees had workers on their boards in 2011. Twenty-six have underperformed the 142-member OMX Copenhagen Index by 8 per cent.