CORPORATE GOVERNANCE

1. The Role of Employees
as Stakeholders in
Corporate Governance

2. 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”.

3. 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

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

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

6. 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

7. 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

8. 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

9. 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…”

10. 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”

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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).

19. 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). )

20. 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

21. 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).

22. 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)

23. 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

24. 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

25. 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