Shareholders Should Welcome Employees as Directors
The most influential theory of corporate governance, principal agency theory, 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 strengthening the monitoring of top management by independent outside directors. 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 conflict: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm 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 connect agency theory with the knowledge-based theory of the firm.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.crema-research.ch
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Linda Babcock & George Loewenstein, 1997. "Explaining Bargaining Impasse: The Role of Self-Serving Biases," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 109-126, Winter.
- Bruno S. Frey & Margit Osterloh, .
"Yes, Managers Should be Paid Like Bureaucrats,"
IEW - Working Papers
187, Institute for Empirical Research in Economics - University of Zurich.
- Bruno S. Frey & Margit Osterloh, 2005. "Yes, Managers Should Be Paid Like Bureaucrats," CESifo Working Paper Series 1379, CESifo Group Munich.
- Bruno S. Frey & Margit Osterloh, 2004. "Yes, Managers Should Be Paid Like Bureaucrats," CREMA Working Paper Series 2005-03, Center for Research in Economics, Management and the Arts (CREMA).
- Anna Grandori, 2001. "Neither Hierarchy nor Identity: Knowledge-Governance Mechanisms and the Theory of the Firm," Journal of Management and Governance, Springer, vol. 5(3), pages 381-399, September.
- Brian J. Hall & Kevin J. Murphy, 2000.
"Stock Options for Undiversified Executives,"
NBER Working Papers
8052, National Bureau of Economic Research, Inc.
- Margit Osterloh & Jetta Frost & Bruno Frey, 2002. "The Dynamics of Motivation in New Organizational Forms," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(1), pages 61-77.
- Jensen, Michael C, 1993.
" The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems,"
Journal of Finance,
American Finance Association, vol. 48(3), pages 831-80, July.
- Michael C. Jensen, 1994. "The Modern Industrial Revolution, Exit, And The Failure Of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(4), pages 4-23.
- Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58.
- Bruno Frey & Matthias Benz & Alois Stutzer, 2004.
"Introducing Procedural Utility: Not Only What, but Also How Matters,"
Journal of Institutional and Theoretical Economics (JITE),
Mohr Siebeck, Tübingen, vol. 160(3), pages 377-, September.
- Bruno S. Frey & Matthias Benz & Alois Stutzer, . "Introducing Procedural Utility: Not only What, but also How Matters," IEW - Working Papers 129, Institute for Empirical Research in Economics - University of Zurich.
- Bruno S. Frey & Matthias Benz & Alois Stutzer, 2003. "Introducing Procedural Utility: Not only What, but also How Matters," CREMA Working Paper Series 2003-02, Center for Research in Economics, Management and the Arts (CREMA).
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Raghuram G. Rajan & Luigi Zingales, 1997.
"Power in a Theory of the Firm,"
NBER Working Papers
6274, National Bureau of Economic Research, Inc.
- Rajan, Raghuram G & Zingales, Luigi, 1998. "Power in a Theory of the Firm," CEPR Discussion Papers 1777, C.E.P.R. Discussion Papers.
- Raghuram G. Rajan & Luigi Zingales, . "Power in a Theory of the Firm," CRSP working papers 335, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Addison, John T. & Schnabel, Claus & Wagner, Joachim, 2003.
"The course of research into the economic consequences of German works councils,"
22, Friedrich-Alexander-University Erlangen-Nuremberg, Chair of Labour and Regional Economics.
- John T. Addison & Claus Schnabel & Joachim Wagner, 2004. "The Course of Research into the Economic Consequences of German Works Councils," British Journal of Industrial Relations, London School of Economics, vol. 42(2), pages 255-281, 06.
- Addison, John T. & Schnabel, Claus & Wagner, Joachim, 2003. "The Course of Research into the Economic Consequences of German Works Councils," IZA Discussion Papers 878, Institute for the Study of Labor (IZA).
- Benjamin E. Hermalin & Michael S. Weisbach, 2003.
"Boards of directors as an endogenously determined institution: a survey of the economic literature,"
Economic Policy Review,
Federal Reserve Bank of New York, issue Apr, pages 7-26.
- Benjamin E. Hermalin & Michael S. Weisbach, 2001. "Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature," NBER Working Papers 8161, National Bureau of Economic Research, Inc.
- John Child & Suzana Rodrigues, 2003. "Corporate Governance and New Organizational Forms: Issues of Double and Multiple Agency," Journal of Management and Governance, Springer, vol. 7(4), pages 337-360, December.
- Giovanni Dosi & Luigi Marengo, 1999. "On the tangled discourse between transaction costs economics and competence-based views of the firms: Some comments," LEM Papers Series 1999/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
- Baruch Lev & Suresh Radhakrishnan, 2003. "The Measurement of Firm-Specific Organization Capital," NBER Working Papers 9581, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cra:wpaper:2005-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna-Lea Werlen)
If references are entirely missing, you can add them using this form.