The stock market and human resource management: evidence from a survey of

French establishments

Corinne Perraudin (CEE, CES)Héloïse Petit (CEE, CES)

Antoine Rebérioux (EconomiX)

22 May 2008, ParisEAEPE International Conference

"Governing the business enterprise: ownership, institutions, and society"

Does corporate governance matter for employment?

Empirical approach that uses micro-data on French business enterprises.

Deep transformation of the French corporate governance system over the last decade.

Figure 3 : stock market capitalisation (as a % of GDP) in three countries, 1991-2006 (Eurostat)

0

50

100

150

200

250

France

UK

Germany

% of equity capital held by non-residents for French listed and non-listed companies (Thesmar and Thoenig, 2004).

The French model of CG

Rise to power of institutional investors (mutual funds and non-resident pension funds)

Changes in financial market law and corporate law: greater protection for minority shareholders

Increasing sensitivity of managers to the interests of minority shareholders and stock

market valuation

Relations between CG and HRM (1)

VoC approach (Hall and Soskice, 2001; Black, Gospel and Pendleton, 2007) : macro-institutional complementarities between the stock market and the labour market

Qualitative case-studies of changes in HRM for listed companies, in the UK (Deakin, Hobbs, Konzelmann and Wilkinson 2006) and in Germany (Jackson, Höpner and Kurdelbusch, 2005)

Differentiation of HRM practices according to whether or not the company is listed and the extent to which its equity capital is held by financial investors ?

Relations between CG and HRM (2)

In a capitalist system, every company has to achieve a level of financial returns at least equals to the cost of capital. But beyond this level ?

The increasing role played by the stock market in CG strengthens the requirement for financial returns

EVA = (ROE – k) . EC ROE = R / ECR : net result = total income – total costEC : book value of equity capitalk: cost of capital (CAPM)

Delaveau et du Tertre, 2007

Relations between CG and HRM (3)

HRM might be used to maximise net result and ROE. Yet two opposite strategies:

“Low road” (Hutton 1995; Porter 1997) : short term financial requirements may result in a cost cutting-oriented approach to HRM. As labour costs are the main component of operating costs, they offer the most direct leverage to increase net profits.

“High road” : investments in human capital through high wages and training expenditures, to increase total income over the long run.

Relations between CG and HRM (4) HRM might be used to control the variations of ROE.

Indeed, any “destruction” of shareholder value (0<ROE<k) runs the risk of provoking a fall in the price of the shares. Hence, a prominent effect of stock market pressure is to strengthen the damaging consequence in case of poor (short term) profit.

Listed companies might seek a greater flexibility for their costs, and in particular for labour costs: Use of flexible forms of employment (fixed-term contracts,

temporary agency workers and subcontracting) Use of flexible pay practices: individual or collective bonus

schemes

Hypothesis

Stock market listing and the penetration of financial funds in equity capital might influence HRM at three different levels:

Increasing needs for flexibility

Level of wage

Training expenditures

Empirical analysis (1) French data-base that merges together a representative survey on

HRM (REPONSE 2004-2005) and an administrative source that provides information on the mean wage in the establishments.

Number of establishment

s

%

Listed companies 993 39.4

with resident funds as the main category of owners

144 5.7

with non-resident funds as the main category of owners

141 5.6

with other shareholders 708 28.1

Non listed companies 1528 60.6

Total 2521 100 %Source: REPONSE 2004/2005, DARES

Empirical analysis (2)

Assess the influence of listing and of the identity of main shareholders on a broad range of HRM practices

Estimation methodology: OLS, dichotomous logit and multinomial logit

Extensive set of controls: Establishment characteristics: sector, size (number of employees

and total income), establishment age, etc. Competitive environment: market share, predictability of

demand, the state of the market over the last few years, etc. Characteristics of the workforce: the structure of occupational

groups, the proportion of employees aged under 40 and the proportion of women

Empirical findings (1):use of temporary work arrangements

Listed

Agency workers 0.249**

Subcontracting 0.342***

Fixed-term employment contract -0.278**

Increase in workforce size over the last 3 years -0.263**

Decrease in workforce size over the last 3 years -0.006

Strong tendency to resort to agency workers or subcontractors among listed companies but weak use of fixed-term labour contracts

Empirical findings (2): pay practices

Listed

Individual bonus for managerial workers 0.692***

Individual bonus for non-managerial workers -0.034

Collective bonus for managerial workers 0.595***

Collective bonus for non-managerial workers 0.560***

Being listed distinctly increases the probability of using individual and collective bonus schemes for all type of employees, specially when non-resident financial funds are the main owners

Empirical findings (3):wages and training

Listed

Mean wage 0.026**

Median wage 0.025***

Training expenditures 0.341***

Wage levels, both average and median, are higher in listed companies, as well as levels of training expenditures: wages and training do not follow a rationale of cost minimisation within listed companies

Conclusion (1) Flexibility. Stock market listing is associated with a strong

search for cost flexibility, through the use of bonus schemes and the use of commercial contracts.

Limited core group. Listed companies tend to maintain the workforce around a relatively limited core group of employees: the negative effect of listing on the use of fixed-term (employment) contracts as well as the reluctance to hire over the last three years are evidence of this strategy.

“High road” strategy. Listed companies adopt an offensive (high road) strategy for HRM. However, this commitment to human resources is concentrated on a relatively limited number of long-term core employees, isolated through the intensive use of commercial contracts.

Conclusion (2)

These findings are in line with the conclusions reached by Jackson, Höpner and Kurdelbusch 2005) in their monographs of German listed companies. ‘Shareholder friendly’ companies tend to: Fall back on a stable core of employees

Increase the level of mean wage

Generalize the use of bonus schemes

British case is quite different: Conway, Deakin, Konzelmann, Petit, Rebérioux and Wilkinson (2007) find no evidence of the “high road” approach to HRM in listed companies.