Monitoring or Payroll Maximization? What Happens When Workers Enter the Boardroom?

Review of Accounting Studies, forthcoming

59 Pages Posted: 31 Jan 2019 Last revised: 4 Jun 2021

See all articles by Cristi A. Gleason

Cristi A. Gleason

University of Iowa - Department of Accounting

Sascha Kieback

University of Muenster

Martin Thomsen

University of Muenster

Christoph Watrin

University of Muenster - Accounting Center

Date Written: June 4, 2021

Abstract

We examine whether worker representation on corporate boards results in improved monitoring or payroll maximization. Several economic theories predict that worker representatives would use control and voting rights in the boardroom to transform firm assets into private benefits and increased wages, but labor contract models suggest that workers’ inside information should permit improved monitoring. To investigate this conflict, we use mandatory worker representation on corporate boards in Germany. Using hand-collected data, our results suggest that the worker representatives’ payroll maximization incentives dominate their monitoring duties. Specifically, worker representatives reduce real earnings management when it results in wage cuts or job losses but not when it increases payroll or job security. Similarly, worker representatives are generally associated with improved monitoring of tax planning activities. However, when the risk of offshoring jobs is high, worker representatives do not promote tax planning for low-aggression firms and instead block aggressive tax planning for high-aggression firms. This evidence helps policymakers and researchers better understand the role of workers in corporate governance systems and contributes to the ongoing public debate about introducing worker representation in the United States and the United Kingdom.

Keywords: worker representation, monitoring, payroll maximization, agency conflict, corporate governance

JEL Classification: G34, H25, K34, M41, M43

Suggested Citation

Gleason, Cristi A. and Kieback, Sascha and Thomsen, Martin and Watrin, Christoph, Monitoring or Payroll Maximization? What Happens When Workers Enter the Boardroom? (June 4, 2021). Review of Accounting Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3322700 or http://dx.doi.org/10.2139/ssrn.3322700

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

Sascha Kieback

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Martin Thomsen

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Christoph Watrin

University of Muenster - Accounting Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

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