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Shareholders Should Welcome Knowledge Workers as Directors

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  • Margit Osterloh
  • Bruno S. 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 firmspecific 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.

Suggested Citation

  • Margit Osterloh & Bruno S. Frey, 2006. "Shareholders Should Welcome Knowledge Workers as Directors," CREMA Working Paper Series 2006-12, Center for Research in Economics, Management and the Arts (CREMA).
  • Handle: RePEc:cra:wpaper:2006-12
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why not worker-directors?
      by chris in Stumbling and Mumbling on 2016-11-21 19:56:20
    2. Ownership in question
      by chris in Stumbling and Mumbling on 2018-08-07 12:39:06

    Citations

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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 & 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, August.
    3. Takahiro NISHI, 2015. "Corporate diversification and board composition in Japanese electronics corporations," International Journal of Business and Management, International Institute of Social and Economic Sciences, vol. 3(2), pages 27-44, May.
    4. Uwe Jirjahn, 2011. "Gender, Worker Representation and the Profitability of Firms in Germany," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(2), pages 281-298, December.
    5. 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).
    6. Gerald Eisenkopf & Stephan Nüesch, 2016. "Third Parties and Specific Investments," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 17(2), pages 151-172, August.
    7. 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.
    8. Emil Inauen & Margit Osterloh & Bruno Frey & Fabian Homberg, 2015. "How a multiple orientation of control reduces governance failures: a focus on monastic auditing," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 763-796, November.
    9. 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).
    10. Mahoney, Joseph T., 2012. "Towards a Stakeholder Theory of Strategic Management," Working Papers 12-0100, University of Illinois at Urbana-Champaign, College of Business.
    11. Katja Rost & Soren Salomo & Margit Osterloh, 2008. "CEO Appointments and the Loss of Firm-specific Knowledge - Putting Integrity Back into Hiring Decisions," CREMA Working Paper Series 2008-27, Center for Research in Economics, Management and the Arts (CREMA).
    12. repec:eee:accfor:v:36:y:2012:i:4:p:279-293 is not listed on IDEAS
    13. Rodríguez Fernández, José Miguel, 2006. "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.
    14. Michel Aglietta & Antoine Rebérioux, 2012. "Financialisation and the Firm," Chapters,in: Handbook on the Economics and Theory of the Firm, chapter 23 Edward Elgar Publishing.
    15. Kevin Levillain & Blanche Segrestin, 2018. "From Primacy to Commitment: Revising corporate governance theories to account for recent legal innovations in the US," Working Papers hal-01777788, HAL.
    16. Biondi, Yuri & Rebérioux, Antoine, 2012. "The governance of intangibles: Rethinking financial reporting and the board of directors," Accounting forum, Elsevier, vol. 36(4), pages 279-293.
    17. Anna Grandori, 2013. "Human capital and property rights," Chapters,in: Handbook of Economic Organization, chapter 15 Edward Elgar Publishing.
    18. Anselm Schneider & Andreas Scherer, 2015. "Corporate Governance in a Risk Society," Journal of Business Ethics, Springer, vol. 126(2), pages 309-323, January.
    19. Labadi, Moufida & Nekhili, Mehdi, 2012. "Structure de propriété et partage de la valeur ajoutée : application aux entreprises françaises non financières du SBF120," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 12.
    20. 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.

    More about this item

    Keywords

    Corporate governance; shareholders; board directors; insiders; firm-specific knowledge;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General

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