Employee Ownership, Board Representation, and Corporate Financial Policies
William L. Megginson
University of Oklahoma
EDHEC Business School
January 10, 2009
21st Australasian Finance and Banking Conference 2008 Paper
French law mandates that employees of large publicly listed companies be allowed to elect two types of directors to represent employees. First, partially privatized companies must reserve two or three (depending on board size) board seats for directors elected by employees by right of employment. Second, employee-shareholders in any public company have the right to elect one director whenever they hold at least 3% of outstanding shares. These two rights have engendered substantial employee representation on the boards of over one-quarter of the largest French companies. Using a comprehensive sample of firms in the Soci¿t¿ des Bourses Fran¿aises (SBF) 120 Index from 1998 to 2005, we examine the impact of employee-directors on corporate valuation, payout policy, and internal board organization and performance. We find that directors elected by employee shareholders unambiguously increase firm valuation and profitability, but do not significantly impact corporate payout (dividends and share repurchases) policy or board organization and performance. Directors elected by employees by right significantly reduce payout ratios, increase overall staff costs, and increase board size, complexity, and meeting frequency but do not significantly impact firm value or profitability. Employee representation on corporate boards thus appears to be at least value-neutral, and even value-enhancing in the case of directors elected by employee shareholders.
Number of Pages in PDF File: 43
Keywords: Employee Ownership, Payout Policy, Privatization, Corporate Boards
JEL Classification: G32, G35, G38, J54, J83working papers series
Date posted: August 27, 2008 ; Last revised: March 18, 2009
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