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Shareholders Should Welcome Knowledge Workers as Directors

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  • Margit Osterloh

    ()

  • Bruno Frey

Abstract

The most influential approach of corporate governance, the view of shareholders’ supremacy does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder’ interests by making the board more responsible to shareholders, and monitoring of top management by independent outside directors should be strengthened. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firm-specific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this dilemma: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm who are making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they provide a step in the direction of a more adequate theory of the firm as a basis for corporate governance. Copyright Springer 2006

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Bibliographic Info

Article provided by Springer in its journal Journal of Management & Governance.

Volume (Year): 10 (2006)
Issue (Month): 3 (September)
Pages: 325-345

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Handle: RePEc:kap:jmgtgv:v:10:y:2006:i:3:p:325-345

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Web page: http://www.springerlink.com/link.asp?id=102940

Related research

Keywords: corporate governance; shareholders; board directors; insiders; firm-specific knowledge; D23; D83; L14; G34; M50;

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Cited by:
  1. Klein, Peter G. & Mahoney, Joseph T. & McGahan, Anita M. & Pitelis, Christos N., 2012. "Who Is in Charge? A Property Rights Perspective on Stakeholder Governance," Working Papers 12-0102, University of Illinois at Urbana-Champaign, College of Business.
  2. Uwe Jirjahn, 2011. "Gender, Worker Representation and the Profitability of Firms in Germany," Research Papers in Economics 2011-06, University of Trier, Department of Economics.
  3. Uwe Jirjahn & Steffen Mueller, 2014. "Non-union worker representation, foreign owners, and the performance of establishments," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 140-163, January.
  4. Uwe Jirjahn & Jens Mohrenweiser & Uschi Backes‐Gellner, 2011. "Works Councils and Learning: On the Dynamic Dimension of Codetermination," Kyklos, Wiley Blackwell, vol. 64(3), pages 427-447, 08.
  5. Mahoney, Joseph T., 2012. "Towards a Stakeholder Theory of Strategic Management," Working Papers 12-0100, University of Illinois at Urbana-Champaign, College of Business.
  6. Y. Biondi & P. Giannoccolo & A. Reberioux, 2010. "Financial disclosure and the Board: A case for non-independent directors," Working Papers 689, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Rodríguez Fernández, José Miguel, . "La responsabilidad social de la empresa: ¿un medio o un fin?," Revista de Dirección y Administración de Empresas, Universidad del País Vasco - Escuela Universitaria de Estudios Empresariales de San Sebastián.
  8. Lippert, Inge, 2008. "Perspektivenverschiebungen in der Corporate Governance: Neuere Ansätze und Studien der Corporate-Governance-Forschung," Discussion Papers, Research Unit: Knowledge, Production Systems and Work SP III 2008-302, Social Science Research Center Berlin (WZB).
  9. Franck Egon, 2012. "Zu den offenen Fragen des Board Primacy Konzeptes in der oekonomischen Theorie der Corporate Governance," Working Papers 0155, University of Zurich, Institute for Strategy and Business Economics (ISU).

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