employee governance

7/29/2019 Employee Governance

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Report on Employee Governance

DEPARTMENT OF MANAGEMENT

LOVELY PROFESSIONAL UNIVERSITY

PHAGWARA

Introduction of Employee Governance

Employee governance, which includes employee ownership and employee participation

in decision making, is regarded by many as morally preferable to control of corporations

by shareholders. However, employee governance is rare in advanced market economies

due to its relative inefficiency compared with shareholder governance. Given this

inefficiency, should employee governance be given up as an impractical ideal? This

article contends that the debate over this question is hampered by an inadequate

conception of employee governance that fails to take into account the difference between


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employees and shareholders. It offers a different, more adequate conception of employee

governance that recognizes a sense in which employees currently have some ownership

rights. The argument for this conception of employee governance is built on an expanded

understanding of the ownership of a firm. The article also suggests new strategies for

strengthening the role of employees in corporate governance.

Employee governance is built on an expanded understanding of the ownership of a firm.

The term employee governance covers various proposals for increasing the control of

employees over matters that affect them. This control may be exercised either directly

through participation in decision making or indirectly through representation in decision-

making bodies, such as seat on the board of directors.

This is a relationship between the firms participants (its employees and shareholders).

The firm allows them to combine to produce goods or services in ways that would not

have been available to each participant as an individual acting alone. Thus, the firm

allows its employees to meet a range of needs. It provides a salary and an opportunity to

use and develop skills. Many people probably find that their work offers them their

greatest opportunity to contribute to the development of society. Shareholders find in the

firm an opportunity to put their capital to productive use and to get a return on it. A

communitys governance is intended to help it achieve its goals; in the end, thecommunitys collective goal is oriented towards helping its members to meet the needs

that brought them to the community. The profound link between the good of the firm and

the flourishing of its participants is what brings corporate governance into the ethical or

moral sphere.

Main objectives of employee governance:

There are two objectives of Employee Governance:

Employee motivation.


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Employee performance.

Sector level Market force

...

Organizational Employee Governance

..

Employee level Employee motivation and Employee participationGraphical representation of employee governance

How market forces affect employee

governance

The conduct orbehaviour of organisations depends on the structure of the

market. In order to adjust to the demands of the market and to improve their

financial position have different strategies at their disposal. It can adjust to

the demands of the market by offering services that other organisations do

not offer such as longer or flexible opening hours. It expect to improve theirmarket share and financial position. We assume that employee governance

can be described by four elements: employment contracts, job design,

reward system and career system. With regard to the reward and career

system, we make a distinction between the focus on pay-for-performance

and the attractiveness of the reward and career system.


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The effects of the introduction of market forces in the

employee motivation.

Expected effects on extrinsic and intrinsic rewards:

On the basis of the theoretical model that the introduction of market forces any

organisations to increase efficiency. In order to realise high personnel efficiency, any

organisations are expected to redefine the way in which they govern their employees. By

increasing the flexibility of employment contracts and the tightness of the job design will

be better. An increase in the flexibility of employment contracts is also expected to

negatively affect the intrinsic rewardsfrom their job, since it requires an increase in

flexibility which is accompanied by an increase in work pressure and less time for giving

special attention and decreases the possibilities of producing comfort, stimulation,

affection and behavioural confirmation from oneself. For similar reasons, an increase in

the tightness of the job design is expected to decrease the intrinsic rewards derive from

their job. It is not expected to influence the extrinsic rewards of the job, since there is no

direct relation between job design and extrinsic rewards.Finally, the attractiveness of the

reward system is expected to affect the extrinsic rewards positively, whereas the

attractiveness of the career system is expected to do the same for both the extrinsic and

intrinsic rewards of the job. An increase in attractiveness of the reward and career system

is expected to increase financial rewards, which raises the production of status and the

Sector level Market forces

Organisation level Employee governance

* employment contracts

* job design

* reward system

* career system

Employee Governance Employee motivation Employeeperformance

extrinsic rewards extrinsicmotivation


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possibilities of producing well-being outside work. Intrinsic rewards are only expected to

be influenced by the attractiveness of the career system, since an increase in possibilities

for personal development means more possibilities for producing stimulation and

behavioural confirmation from yourself.

Six Neccessary conditions for employee

governance: (i) Participation in decision making.

(ii) Economic return to the participants based on the surplus they produce.

(iii) Sharing management-level information with employees.


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(iv) Guaranteed individual rights.

(v) An independent appeals system.

(vi) A complex participatory/democratic consciousness.

The lesson for publicly traded corporations who are encouraging employee ownership is

that they need to introduce each of these six minimally necessary conditions if they are

not to either jeopardise the performance of their business or give employee ownership a

bad name.

Without a division of power into two or more boards, it is not possible to establish either

"an independent appeals systems" or provide "guaranteed individual rights". The division

of information and control into two or more boards also

facilitates constructive "participation in decision making" and "sharing management-level

information". It is not constructive to have an employee representative appointed to the

management board as a way to either promote "participation in decision making" or

"sharing management-level information". It simply introduces unconscionable conflicts

of interest for the nominee which generates suspicion by his or her board colleagues that

confidential information will be widely shared or suspicion by the nominees

constituency the he or she is being captured and/or has misplaced loyalties.

The decomposition of decision-making labour into two or more boards provides firms

with operating advantages even if they are not employee-owned. The competitive

advantages of decomposing decision-making labour increases, as businesses become

more complex and knowledge intensive. Directors of unitary boards become subjected to

the problems of information overload and having to make decisions on strategic technical

issues beyond their experience, training or knowledge. The success of VISA International

is based on it being controlled by hundreds of boards each with its own exclusive

functional or regional discretions.

External directors cannot properly carry out their duties for shareholders unless they

establish separate boards of advice constituted by those people on whom all firms depend

for their very existence. The competitive advantage of a business depends upon at least

meeting, if not exceeding, the expectations of its strategic stakeholders such as its


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employees, customers and suppliers. All such stakeholders are recorded in the books of

the business to provide a basis for establishing employee councils, customer forums, and

supplier assemblies to advise both management and the external directors on the

qualitative performance of the business.

Shareholders have right to expect that external directors will establish processes to obtain

information independently of management on the performance of management to allow

them to properly carry-out their duties to monitor, control, reward or retire management.

External directors in the US, UK and Australia mostly fail to either carry out their duty or

justify their existence in this regard. This is a matter of concern in the US. Harvard

Professor Michael Porter recommending that shareholders, companies and the

government encourage the involvement of strategic stakeholders in the governance of

corporations in his 1992 report for The Council on Competitiveness.

It is in the interest of both shareholders and the national economy to involve employees,

customers and suppliers in corporate governance. Stakeholder governance becomes

critically important for promoting employee ownership. Not only does it maximise the

ability of employee ownership to add value but it also provides a means to avoid value-

destroying conflicts of interest between management and investors through the

introduction of two or more boards. Stakeholder governance also avoids the confidence

destroying conflicts of interests, which arise between management and employees when

the employees become significant owners as noted by Bernstein.

Policies for encouraging employee ownership will become counter productive as

employed shareholders increase unless stakeholder governance is also introduced. The

UK government provides a number of tax incentives to encourage employee ownership

and complementing these policies it is now considering changing corporate law to make

directors accountable to "employees, creditors, customers, the environment, and thewider community". This broader view of directors duties was recommended to the

Government by an inquiry held by the Royal Society for Arts into "Tomorrow's

Company". This private sector initiative, led by business leaders, recommended an

"inclusive approach" to corporate governance.


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An additional incentive for formally including stakeholders in the governance of publicly traded

firms is the lack of involvement by shareholders in making directors and management

accountable. Institutional investors are now the largest owners of public companies but they

mostly fail to take an active interest in making directors accountable. The number of significant

institutional investors in either Australia or the UK is less than the number of members in either

national Parliament. So even if institutions were active in corporate governance it would raise

questions as to the economic legitimacy of democracy.

Even in 1976, when the proportion of institutional ownership was less than half its present level,

Peter Drucker, wrote,The Unseen Revolution: How Pension Fund Socialism Came to

America.The irony is that while more voters than ever are sharing in the ownership of the means

of production, control is becoming ever more concentrated and weaker. This is undermining the

accountability of firms to create value for shareholders and the economy and the politicallegitimacy of corporations.

Employee ownership provides a way to not only improve economic performance but also to give

political legitimacy to business. However, for employee ownership to achieve both objectives,

companies will need to introduce the six minimally necessary conditions identified by Bernstein.

This in turn will depend upon firms introducing stakeholder governance with a constructive

division of power between two or more boards and stakeholder councils.

What is the need for employee governance:

The need for motivation of employees

Enhance participation of employees

To generate feeling of belongingness in the employees


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To enhance responsibility and accountability in employees

For enhancing productivity and efficiency.

Levels of decision making

Employee-ownership companies each choose their own levels and kinds of

participation, but they all must manage peoples expectations about decision

making

Companies that do not consciously address peoples expectations may well find

increasing cynicism and distrust

Decision making, however, is a complex, multi-dimensional issue

people may be clear that they expect increased authority to make decisions, they

may be less clear about the full meaning and implications of such authority.

While ownership often does bring new rights, responsibilities are equally

important to a healthy ownership culture

An ideal ownership culture has strong decision-making rights paired with strong

decision-making responsibilities.

Components of participative decision making:

The first responsibility of decision makers is to take their authority seriously.

They should invest the time, energy and thought required to make the best

decision possible. They need to commit to attending meetings, gathering

information, and investigating alternatives.


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The second responsibility borne by decision makers is responsible voice, the

key component of which is recognizing other peoples expertise. There need to

be clear and accepted boundaries between decision makers.

Producing this clarity is a major ownership culture challenge. This challenge is a

process that involves changes in both structures and attitudes.

THINGS TO BE KEPT IN MIND WHILE

INTRODUCING THIS CONCEPT

A good first step is to clearly lay out existing areas of decision-making and

responsibility, as well as a step-by-step process to determine who is deciding

what.

Once it is clear where decision making responsibility lies, managers will be

reassured about their position--and this psychological safety will free them up to

solicit input.

The major reason for a lack of employee governance appears to be the relative

inefficiency of worker-managed and worker owned firms.

Employee governance consists largely of control over the workplace and, in

particular, the terms and conditions of employment.

NEGATIVE IMPLICATIONS OF EMPLOYEE

GOVERNANCE

Employees will be over confident

Role of management becomes limited.


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Employees may not skills for run the company.

AN EXAMPLE OF EMPLOYEE GOVERNANCE:

Distinguishing the Carris Companies' transition to 100% employee ownership was its

more unusual movement towards 100% employee governance. In 2001, employees

shared 43.2% corporate ownership within an Employee Stock Ownership Plan (ESOP).

An ESOP is a form of worker ownership and deferred benefit plan recognised within the

United States legal code. William H. (Bill) Cards, visionary CEO of this privately held

company, described in his Long Term Plan (1994) unique goals that he had for corporate

governance and the transfer of ownership, rights and responsibilities to the employees--in

effect instituting the practice of' governance. `Taking a practice-based stakeholder

view ... significantly alters the approach to the firm and its responsibilities, broadening

the understanding of those to whom a firm is accountable.

It moves the conversation ... toward the quality and nature of the relationships that

companies develop with stakeholders and the assessment of the impacts of corporate

activities on those stakeholder.

employee governance

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