Report on Employee Governance

DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA

Introduction of Employee Governance

Employee governance, which includes employee ownership and employee participation in decision making, is regarded by many as morally preferable to control of corporations by shareholders. However, employee governance is rare in advanced market economies due to its relative inefficiency compared with shareholder governance. Given this inefficiency, should employee governance be given up as an impractical ideal? This article contends that the debate over this question is hampered by an inadequate conception of employee governance that fails to take into account the difference between

employees and shareholders. It offers a different, more adequate conception of employee governance that recognizes a sense in which employees currently have some ownership rights. The argument for this conception of employee governance is built on an expanded understanding of the ownership of a firm. The article also suggests new strategies for strengthening the role of employees in corporate governance. Employee governance is built on an expanded understanding of the ownership of a firm. The term employee governance covers various proposals for increasing the control of employees over matters that affect them. This control may be exercised either directly through participation in decision making or indirectly through representation in decisionmaking bodies, such as seat on the board of directors. This is a relationship between the firms participants (its employees and shareholders). The firm allows them to combine to produce goods or services in ways that would not have been available to each participant as an individual acting alone. Thus, the firm allows its employees to meet a range of needs. It provides a salary and an opportunity to use and develop skills. Many people probably find that their work offers them their greatest opportunity to contribute to the development of society. Shareholders find in the firm an opportunity to put their capital to productive use and to get a return on it. A communitys governance is intended to help it achieve its goals; in the end, the communitys collective goal is oriented towards helping its members to meet the needs that brought them to the community. The profound link between the good of the firm and the flourishing of its participants is what brings corporate governance into the ethical or moral sphere.

Main objectives of employee governance:

There are two objectives of Employee Governance: Employee motivation.

 Employee performance.

Sector level

Market forces

... Organizational Employee Governance

.. Employee level Employee motivation and Employee participation

Graphical representation of employee governance

How market governance

forces

affect

employee

The conduct or behaviour of organisations depends on the structure of the market. In order to adjust to the demands of the market and to improve their financial position have different strategies at their disposal. It can adjust to the demands of the market by offering services that other organisations do not offer such as longer or flexible opening hours. It expect to improve their market share and financial position. We assume that employee governance can be described by four elements: employment contracts, job design, reward system and career system. With regard to the reward and career system, we make a distinction between the focus on pay-for-performance and the attractiveness of the reward and career system.

Sector level Organisation level

Market forces

Employee governance * employment contracts * job design * reward system * career system
Employee motivation extrinsic rewards Employee extrinsic

Employee Governance performance motivation performanceeffects The

of the introduction of market forces in the

employee motivation.

Expected effects on extrinsic and intrinsic rewards:

On the basis of the theoretical model that the introduction of market forces any

organisations to increase efficiency. In order to realise high personnel efficiency, any organisations are expected to redefine the way in which they govern their employees. By increasing the flexibility of employment contracts and the tightness of the job design will be better. An increase in the flexibility of employment contracts is also expected to negatively affect the intrinsic rewardsfrom their job, since it requires an increase in flexibility which is accompanied by an increase in work pressure and less time for giving special attention and decreases the possibilities of producing comfort, stimulation, affection and behavioural confirmation from oneself. For similar reasons, an increase in the tightness of the job design is expected to decrease the intrinsic rewards derive from their job. It is not expected to influence the extrinsic rewards of the job, since there is no direct relation between job design and extrinsic rewards.Finally, the attractiveness of the reward system is expected to affect the extrinsic rewards positively, whereas the attractiveness of the career system is expected to do the same for both the extrinsic and intrinsic rewards of the job. An increase in attractiveness of the reward and career system is expected to increase financial rewards, which raises the production of status and the

possibilities of producing well-being outside work. Intrinsic rewards are only expected to be influenced by the attractiveness of the career system, since an increase in possibilities for personal development means more possibilities for producing stimulation and behavioural confirmation from yourself.

Six Neccessary conditions for employee governance:

(i) Participation in decision making. (ii) Economic return to the participants based on the surplus they produce. (iii) Sharing management-level information with employees.

 (iv) Guaranteed individual rights. (v) An independent appeals system. (vi) A complex participatory/democratic consciousness. The lesson for publicly traded corporations who are encouraging employee ownership is that they need to introduce each of these six minimally necessary conditions if they are not to either jeopardise the performance of their business or give employee ownership a bad name. Without a division of power into two or more boards, it is not possible to establish either "an independent appeals systems" or provide "guaranteed individual rights". The division of information and control into two or more boards also facilitates constructive "participation in decision making" and "sharing management-level information". It is not constructive to have an employee representative appointed to the management board as a way to either promote "participation in decision making" or "sharing management-level information". It simply introduces unconscionable conflicts of interest for the nominee which generates suspicion by his or her board colleagues that confidential information will be widely shared or suspicion by the nominees constituency the he or she is being captured and/or has misplaced loyalties. The decomposition of decision-making labour into two or more boards provides firms with operating advantages even if they are not employee-owned. The competitive advantages of decomposing decision-making labour increases, as businesses become more complex and knowledge intensive. Directors of unitary boards become subjected to the problems of information overload and having to make decisions on strategic technical issues beyond their experience, training or knowledge. The success of VISA International is based on it being controlled by hundreds of boards each with its own exclusive functional or regional discretions. External directors cannot properly carry out their duties for shareholders unless they establish separate boards of advice constituted by those people on whom all firms depend for their very existence. The competitive advantage of a business depends upon at least meeting, if not exceeding, the expectations of its strategic stakeholders such as its

employees, customers and suppliers. All such stakeholders are recorded in the books of the business to provide a basis for establishing employee councils, customer forums, and supplier assemblies to advise both management and the external directors on the qualitative performance of the business. Shareholders have right to expect that external directors will establish processes to obtain information independently of management on the performance of management to allow them to properly carry-out their duties to monitor, control, reward or retire management. External directors in the US, UK and Australia mostly fail to either carry out their duty or justify their existence in this regard. This is a matter of concern in the US. Harvard Professor Michael Porter recommending that shareholders, companies and the government encourage the involvement of strategic stakeholders in the governance of corporations in his 1992 report for The Council on Competitiveness. It is in the interest of both shareholders and the national economy to involve employees, customers and suppliers in corporate governance. Stakeholder governance becomes critically important for promoting employee ownership. Not only does it maximise the ability of employee ownership to add value but it also provides a means to avoid valuedestroying conflicts of interest between management and investors through the introduction of two or more boards. Stakeholder governance also avoids the confidence destroying conflicts of interests, which arise between management and employees when the employees become significant owners as noted by Bernstein. Policies for encouraging employee ownership will become counter productive as employed shareholders increase unless stakeholder governance is also introduced. The UK government provides a number of tax incentives to encourage employee ownership and complementing these policies it is now considering changing corporate law to make directors accountable to "employees, creditors, customers, the environment, and the wider community". This broader view of directors duties was recommended to the Government by an inquiry held by the Royal Society for Arts into "Tomorrow's Company". This private sector initiative, led by business leaders, recommended an "inclusive approach" to corporate governance.

An additional incentive for formally including stakeholders in the governance of publicly traded firms is the lack of involvement by shareholders in making directors and management accountable. Institutional investors are now the largest owners of public companies but they mostly fail to take an active interest in making directors accountable. The number of significant institutional investors in either Australia or the UK is less than the number of members in either national Parliament. So even if institutions were active in corporate governance it would raise questions as to the economic legitimacy of democracy. Even in 1976, when the proportion of institutional ownership was less than half its present level, Peter Drucker, wrote, The Unseen Revolution: How Pension Fund Socialism Came to America. The irony is that while more voters than ever are sharing in the ownership of the means of production, control is becoming ever more concentrated and weaker. This is undermining the accountability of firms to create value for shareholders and the economy and the political legitimacy of corporations. Employee ownership provides a way to not only improve economic performance but also to give political legitimacy to business. However, for employee ownership to achieve both objectives, companies will need to introduce the six minimally necessary conditions identified by Bernstein. This in turn will depend upon firms introducing stakeholder governance with a constructive division of power between two or more boards and stakeholder councils.

What is the need for employee governance:

The need for motivation of employees Enhance participation of employees To generate feeling of belongingness in the employees

 To enhance responsibility and accountability in employees For enhancing productivity and efficiency.

Levels of decision making

Employee-ownership companies each choose their own levels and kinds of

participation, but they all must manage peoples expectations about decision making Companies that do not consciously address peoples expectations may well find increasing cynicism and distrust Decision making, however, is a complex, multi-dimensional issue people may be clear that they expect increased authority to make decisions, they may be less clear about the full meaning and implications of such authority. While ownership often does bring new rights, responsibilities are equally important to a healthy ownership culture An ideal ownership culture has strong decision-making rights paired with strong decision-making responsibilities.

Components of participative decision making:

The first responsibility of decision makers is to take their authority seriously. They should invest the time, energy and thought required to make the best decision possible. They need to commit to attending meetings, gathering information, and investigating alternatives.

 The second responsibility borne by decision makers is responsible voice, the key component of which is recognizing other peoples expertise. There need to be clear and accepted boundaries between decision makers. Producing this clarity is a major ownership culture challenge. This challenge is a process that involves changes in both structures and attitudes.

THINGS TO BE KEPT IN MIND WHILE INTRODUCING THIS CONCEPT

A good first step is to clearly lay out existing areas of decision-making and responsibility, as well as a step-by-step process to determine who is deciding what. Once it is clear where decision making responsibility lies, managers will be reassured about their position--and this psychological safety will free them up to solicit input. The major reason for a lack of employee governance appears to be the relative inefficiency of worker-managed and worker owned firms. Employee governance consists largely of control over the workplace and, in particular, the terms and conditions of employment.

NEGATIVE IMPLICATIONS OF EMPLOYEE GOVERNANCE

Employees will be over confident Role of management becomes limited.

 Employees may not skills for run the company.

AN EXAMPLE OF EMPLOYEE GOVERNANCE:

Distinguishing the Carris Companies' transition to 100% employee ownership was its more unusual movement towards 100% employee governance. In 2001, employees shared 43.2% corporate ownership within an Employee Stock Ownership Plan (ESOP). An ESOP is a form of worker ownership and deferred benefit plan recognised within the United States legal code. William H. (Bill) Cards, visionary CEO of this privately held company, described in his Long Term Plan (1994) unique goals that he had for corporate governance and the transfer of ownership, rights and responsibilities to the employees--in effect instituting the practice of' governance. `Taking a practice-based stakeholder view ... significantly alters the approach to the firm and its responsibilities, broadening the understanding of those to whom a firm is accountable. It moves the conversation ... toward the quality and nature of the relationships that companies develop with stakeholders and the assessment of the impacts of corporate activities on those stakeholder.