The Role of Employees as Stakeholders in Corporate Governance Roustem

The Role of Employees as Stakeholders in Corporate Governance Roustem Davletguildeev Trade Unions Advisory Committee to the OECD Third Eurasian Roundtable on Corporate Governance, 29-30 October, 2003, Bishkek

The Preamble to the OECD Principles on Corporate Governance “ Employees and other stakeholders play an important role in contributing to the long-term success and performance of the corporation, while governments establish the overall institutional and legal framework for corporate governance”.

Essential points for the presentation what is the difference between insider and outsider models of the Corporate Governance in application to the Eurasian needs the importance of the Corporate Social Responsibility’s concept for the present situation in Europe which are the essential forms of the employees’ participation conclusions

Main Stakeholders Shareholders Employees Management Customers Creditors (i.e. Banks) Suppliers Local Communities Others

Two models of Corporate Governance Outsider (shareholders) model Insider (stakeholders) model

The outsider model A priority to market regulation the owners of firms tend to have a transitory interest in the firm The absence of close relationships between shareholders and management the existence of an active market for corporate control - takeovers, particularly hostile ones the primacy of shareholder rights over those of other organisational groups

The insider model The priority to stakeholders control The owners of firms tend to have an enduring interest in the company They often hold positions on the board of directors or other senior managerial positions The relationships between management and shareholders are close and stable There is little by way of a market for corporate control the existence of formal rights for employees to influence key managerial decisions

Insider model in Eurasian countries The mass privatisation with favourable conditions for employees in Eurasian countries has created prerequisites for the insider model of corporate governance The Russian tendency that the employees’ shares pass to other holders is also present in Eurasian countries but not so sharp Particularity for some countries is the high concentration of share’s capital at the management Nevertheless, employees continue to play important role as shareholders in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Ukraine and Uzbekistan

International private initiative in CG The role of employees in corporate governance has an important place in widespread corporate governance guidelines and codes of conduct as, for example, in Corporate Governance Forum Principles (1998), Bosh Report, General Motors Board Guidelines, Dey Report and others (Holly J. Gregory, International comparison of board “Best practices” in developed markets, 1999 ) As said in Corporate Governance Forum Principles: “ Without stable cooperation between employees and management, shareholders’ value will never be maximised ”

The European Union’s concept of CSR Green Paper “Promoting a European Framework for Corporate Social Responsibility” (2001) defined CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” As indicated in Communication of Commission (2002) “Within a business CSR relates to quality employment, lifelong learning, information, consultation and participation of workers, equal opportunities, integration of people with disabilities anticipation of industrial change and restructuring. Social dialogue is seen as a powerful instrument to address employment-related issues”

Corporate Social Responsibility in Russia Voluntary initiative for the reporting system on corporate social responsible conduct within the Russian managers association (more than 180 companies’ reports) Creation by Alfa-group, Interros, Ukos and BP, Shell, Cisco Systems of the Russia partnership for action on corporate governance and social responsibility

Employees’ involvement in Corporate Governance Strengths the system of human resource management Increases the labour motivation Raises legitimacy and authority of the decision making Improves the corporate culture Contributes to economic grow and social stability

Forms of the Employees’ Participation Collective bargaining Information and consultation procedures Financial participation: equity sharing and profit sharing Co-determination: employees’ representation on boards of directors and works councils

Collective bargaining Traditional channel for the social dialogue Trade union as a main employees’ representative Mainly non-acceptance in the corporate governance framework in Eurasia High potential in European Union Need of advanced level corporate culture in relationships between management and trade union

Employees’ financial participation Equity sharing means employee share ownership: Employee Share Ownership Plan (ESOP) Stock bonus plans Stock option plans Employee buyout Worker Cooperatives Profit sharing is the distribution of share profit among employees: Cash-based sharing of annual profits Deferred profit-sharing

Employee stock options Motivation and productivity - creation of entrepreneurial spirit within the firm by aligning the interests of employees and shareholders. Personnel recruitment and retention - usually stock options cannot be exercised for several years after grant and become void if an employee leaves the company. Thus the options tie employees to their employers which is important for companies that invest in human capital. Capital and liquidity-related reasons - a possibility for the company to remunerate employees without an immediate drain on liquid assets

Employee stock options (Cont.) Measures to promote employee stock options will be most beneficial if they are part of consistent national approaches to employee participation

The case of the USA employee stock options have become a regular and widely used instrument for the compensation of employees, in particular the higher management Over 80% of the 500 biggest quoted companies have introduced employee stock option plans In the late 1990s between 7 and 10 million employees annually received stock options, several times more than in the early 1990s when the number of recipients of options was estimated at around a million. 86% of employers offer stock options to employees and that in 2000, 19% of all employees were eligible for stock options compared to only 12% in 1998 (Watson Wyatt Worldwide, 2000).

The case of the EU In Belgium since 1999 between 70,000 and 75,000 employees have received stock options. Today almost all of the 20 largest Belgian companies (BEL20) operate stock option plans. In Germany in 1997 ten employee stock option programmes were introduced in German companies, today over two-thirds of companies included in the German stock index (DAX) run such plans. In France approximately 50% of all quoted companies and 95% of the quoted companies have introduced stock option plans. (PricewaterhouseCoopers (2002). )

The case of Eurasian countries Big proportion of employees as shareholders within joint stock companies created by the mass privatisation usually doesn't mean their involvement in corporate governance Employee financial participation exists mainly for high managers in multinational companies

Information and Consultation Employees’ representatives have the right to be informed before the decision on issues such as the restructuring of the workforce, the relocation of plants, reduced working hours, vocational training schemes, systems of organizing and monitoring work, time studies, the setting of bonuses and pay incentives, job evaluation, or a change in the legal status of the enterprise which would affect staffing levels They have the right to be consulted before decisions are actually taken on matters of collective relevance ( transfers, major changes in conditions, cases of suspension of the contract of employment or collective dismissal/redundancy).

Co-determination In a majority of EU countries, there is a statutory system for some form of employee representation on the board of directors or supervisory boards of some types of company. Statutory works councils systems based on legislation or widely applicable collective agreements exist in 12 EU members (primary is the German model of the betriebsrat)

EU Directives on employees’ participation The European Works Councils (EWCs) Directive (94/45/EC ) has introduced pan-European structures for the information and consultation of employees and their representatives on a range of business and employment issues in multinational companies over a certain size operating in the EU; The recent Directive (2002/14/EC) establishing a general framework for informing and consulting employees will require all undertakings with at least 50 employees (or establishments with at least 20 employees) to provide employee representatives with information and/or consultation on a range of business, employment and work organisation issues. Directives (2001/86/EC and 2003/72/EC), adopted in October 2001 and in July 2003, provide for employee involvement (through both information and consultation structures or procedures and board-level participation) in 'European Company' (Société Européenne) and in European Cooperative Society – the new optional form of Europe-wide company set up under the European Company Statute; and various Directives have guaranteed information and/or consultation on specific issues, notably collective redundancies , business transfers and health and safety

The case of Eurasian countries The Soviet Labour Law has contained detailed provisions on workers’ participation in the governance of the socialistic enterprise Actually only Kyrgyz Labour Code 1997 remains the notion “labour collective” and provides the creation of works councils (chapter 3) All Eurasian countries have the possibility to obtain the employees’ participation in dialogue with trade unions

What should be doing Provide inclusion into the labour legislation of the norms on employees’ participation taking into account the particularity of the mentality Obtain the coordination between norms of commercial, civil and labour law concerning corporate governance Give the possibility de-jure and de-facto to trade unions present employees in CG Promote the voluntary initiative on CSR