The Role of Employees The Role of Employees as Stakeholders in as Stakeholders in

Corporate GovernanceCorporate Governance

Roustem DavletguildeevRoustem Davletguildeev

Trade Unions Advisory Committee to the OECDTrade Unions Advisory Committee to the OECD

Third Eurasian Roundtable on Corporate Third Eurasian Roundtable on Corporate Governance, 29-30 October, 2003, BishkekGovernance, 29-30 October, 2003, Bishkek

The Preamble to the OECD The Preamble to the OECD Principles on Corporate Principles on Corporate GovernanceGovernance

“… “… Employees and other stakeholders Employees and other stakeholders play an important role in contributing to play an important role in contributing to the long-term success and performance the long-term success and performance of the corporation, while governments of the corporation, while governments establish the overall institutional and establish the overall institutional and legal framework for corporate legal framework for corporate governance”.governance”.

Essential points for the Essential points for the presentationpresentation

what is the difference between insider and what is the difference between insider and outsider models of the Corporate Governance outsider models of the Corporate Governance in application to the Eurasian needsin application to the Eurasian needs

the importance of the Corporate Social the importance of the Corporate Social Responsibility’s concept for the present Responsibility’s concept for the present situation in Europesituation in Europe

which are the essential forms of the which are the essential forms of the employees’ participationemployees’ participation

conclusionsconclusions

Main StakeholdersMain Stakeholders

ShareholdersShareholders EmployeesEmployees ManagementManagement CustomersCustomers Creditors (i.e. Banks)Creditors (i.e. Banks) SuppliersSuppliers Local CommunitiesLocal Communities OthersOthers

Two models of Two models of Corporate Corporate GovernanceGovernance

Outsider (shareholders) modelOutsider (shareholders) model

Insider (stakeholders) model Insider (stakeholders) model

The outsider modelThe outsider model

A priority to market regulationA priority to market regulation the owners of firms tend to have a transitory the owners of firms tend to have a transitory

interest in the firminterest in the firm The absence of close relationships between The absence of close relationships between

shareholders and management shareholders and management the existence of an active `market for corporate the existence of an active `market for corporate

control´ - takeovers, particularly hostile onescontrol´ - takeovers, particularly hostile ones the primacy of shareholder rights over those of the primacy of shareholder rights over those of

other organisational groupsother organisational groups

The insider modelThe insider model

The priority to stakeholders controlThe priority to stakeholders control The owners of firms tend to have an enduring The owners of firms tend to have an enduring

interest in the companyinterest in the company They often hold positions on the board of They often hold positions on the board of

directors or other senior managerial positionsdirectors or other senior managerial positions The relationships between management and The relationships between management and

shareholdersshareholders are close and stableare close and stable There is little by way of a market for corporate There is little by way of a market for corporate

controlcontrol the existence of formal rights for employees to the existence of formal rights for employees to

influence key managerial decisionsinfluence key managerial decisions

Insider model in Eurasian Insider model in Eurasian countriescountries

The mass privatisation with favourable conditions for The mass privatisation with favourable conditions for employees in Eurasian countries has created employees in Eurasian countries has created prerequisites for the insider model of corporate prerequisites for the insider model of corporate governancegovernance

The Russian tendency that the employees’ shares The Russian tendency that the employees’ shares pass to other holders is also present in Eurasian pass to other holders is also present in Eurasian countries but not so sharpcountries but not so sharp

Particularity for some countries is the high Particularity for some countries is the high concentration of share’s capital at the managementconcentration of share’s capital at the management

Nevertheless, employees continue to play important Nevertheless, employees continue to play important role as shareholders in Armenia, Azerbaijan, Georgia, role as shareholders in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Ukraine and Kazakhstan, Kyrgyzstan, Moldova, Ukraine and UzbekistanUzbekistan

International private International private initiative in CGinitiative in CG

The role of employees in corporate governance has an The role of employees in corporate governance has an important place in widespread corporate governance important place in widespread corporate governance guidelines and codes of conduct as, for example, in guidelines and codes of conduct as, for example, in Corporate Governance Forum Principles (1998), Bosh Corporate Governance Forum Principles (1998), Bosh Report, General Motors Board Guidelines, Dey Report Report, General Motors Board Guidelines, Dey Report and others (Holly J. Gregory, International comparison and others (Holly J. Gregory, International comparison of board “Best practices” in developed markets, 1999 ) of board “Best practices” in developed markets, 1999 )

As said in Corporate Governance Forum Principles: “…As said in Corporate Governance Forum Principles: “…Without stable cooperation between employees and Without stable cooperation between employees and management, shareholders’ value will never be management, shareholders’ value will never be maximised…” maximised…”

The European Union’s The European Union’s concept of CSRconcept of CSR

Green Paper “Green Paper “Promoting a European Framework for Promoting a European Framework for Corporate Social ResponsibilityCorporate Social Responsibility”” (2001) defined CSR (2001) defined CSR as “as “a concept whereby companies integrate social and a concept whereby companies integrate social and environmental concerns in their business operations environmental concerns in their business operations and in their interaction with their stakeholders on a and in their interaction with their stakeholders on a voluntary basisvoluntary basis””

As indicated in Communication of Commission (2002) As indicated in Communication of Commission (2002) “Within a business CSR relates to quality employment, “Within a business CSR relates to quality employment, lifelong learning, information, consultation and lifelong learning, information, consultation and participation of workers, equal opportunities, integration participation of workers, equal opportunities, integration of people with disabilities anticipation of industrial of people with disabilities anticipation of industrial change and restructuring. Social dialogue is seen as a change and restructuring. Social dialogue is seen as a powerful instrument to address employment-related powerful instrument to address employment-related issues”issues”

Corporate Social Corporate Social Responsibility in RussiaResponsibility in Russia

Voluntary initiative for the reporting system on Voluntary initiative for the reporting system on corporate social responsible conduct within the corporate social responsible conduct within the Russian managers association (more than 180 Russian managers association (more than 180 companies’ reports)companies’ reports)

Creation by Alfa-group, Interros, Ukos and BP, Creation by Alfa-group, Interros, Ukos and BP, Shell, Cisco Systems of the Russia partnership Shell, Cisco Systems of the Russia partnership for action on corporate governance and social for action on corporate governance and social responsibilityresponsibility

Employees’ involvement Employees’ involvement in Corporate Governancein Corporate Governance

Strengths the system of human resource Strengths the system of human resource managementmanagement

Increases the labour motivationIncreases the labour motivation Raises legitimacy and authority of the Raises legitimacy and authority of the

decision makingdecision making Improves the corporate culture Improves the corporate culture Contributes to economic grow and social Contributes to economic grow and social

stabilitystability

Forms of the Employees’ Forms of the Employees’ ParticipationParticipation

Collective bargainingCollective bargaining Information and consultation proceduresInformation and consultation procedures Financial participation: equity sharing and Financial participation: equity sharing and

profit sharing profit sharing Co-determination: employees’ Co-determination: employees’

representation on boards of directors and representation on boards of directors and works councilsworks councils

Collective bargainingCollective bargaining

Traditional channel for the social dialogueTraditional channel for the social dialogue Trade union as a main employees’ Trade union as a main employees’

representativerepresentative Mainly non-acceptance in the corporate Mainly non-acceptance in the corporate

governance framework in Eurasiagovernance framework in Eurasia High potential in European UnionHigh potential in European Union Need of advanced level corporate culture in Need of advanced level corporate culture in

relationships between management and trade relationships between management and trade union union

Employees’ financial Employees’ financial participationparticipation

Equity sharing means employee share Equity sharing means employee share ownership:ownership: Employee Share Ownership Plan (ESOP)Employee Share Ownership Plan (ESOP) Stock bonus plansStock bonus plans Stock option plansStock option plans Employee buyoutEmployee buyout Worker CooperativesWorker Cooperatives

Profit sharing is the distribution of share profit Profit sharing is the distribution of share profit among employees:among employees: Cash-based sharing of annual profitsCash-based sharing of annual profits Deferred profit-sharingDeferred profit-sharing

Employee stock optionsEmployee stock options

Motivation and productivity - creatreationion of of entrepreneurial spirit within the firm by aligning the entrepreneurial spirit within the firm by aligning the interests of employees and shareholders. interests of employees and shareholders.

Personnel recruitment and retention - uusually stock sually stock options cannot be exercised for several years after options cannot be exercised for several years after grant and become void if an employee leaves the grant and become void if an employee leaves the company. Thus the options tie employees to their company. Thus the options tie employees to their employers which is important for companies that invest employers which is important for companies that invest in human capital. in human capital.

Capital and liquidity-related reasons - a possibility for the company to remunerate employees without an immediate drain on liquid assets

Employee stock options Employee stock options (Cont.)(Cont.)

Measures to promote employee stock options Measures to promote employee stock options will be most beneficial if they are part of will be most beneficial if they are part of consistent national approaches to employee consistent national approaches to employee participation participation

The case of the USAThe case of the USA employee stock options have become a regular and employee stock options have become a regular and

widely used instrument for the compensation of widely used instrument for the compensation of employees, in particular the higher managementemployees, in particular the higher management

Over 80% of the 500 biggest quoted companies have Over 80% of the 500 biggest quoted companies have introduced employee stock option plansintroduced employee stock option plans

In the late 1990s between 7 and 10 million employees In the late 1990s between 7 and 10 million employees annually received stock options, several times more annually received stock options, several times more than in the early 1990s when the number of recipients than in the early 1990s when the number of recipients of options was estimated at around a million.of options was estimated at around a million.

86% of employers offer stock options to employees 86% of employers offer stock options to employees and that in 2000, 19% of all employees were eligible for and that in 2000, 19% of all employees were eligible for stock options compared to only 12% in 1998 (Watson stock options compared to only 12% in 1998 (Watson Wyatt Worldwide, 2000).Wyatt Worldwide, 2000).

The case of the EUThe case of the EU

In In Belgium sBelgium since 1999 between 70,000 and 75,000 ince 1999 between 70,000 and 75,000 employees have received stock options. Today almost employees have received stock options. Today almost all of the 20 largest Belgian companies (BEL20) all of the 20 largest Belgian companies (BEL20) operate stock option plans. operate stock option plans.

In In GermanyGermany in 1997 ten employee stock option in 1997 ten employee stock option programmes were introduced in German companies, programmes were introduced in German companies, today over two-thirds of companies included in the today over two-thirds of companies included in the German stock index (DAX) run such plans. German stock index (DAX) run such plans.

InIn France France approximately 50% of all quoted companies approximately 50% of all quoted companies and 95% of the quoted companies have introduced and 95% of the quoted companies have introduced stock option plans. stock option plans.

(PricewaterhouseCoopers (2002).(PricewaterhouseCoopers (2002). ))

The case of Eurasian The case of Eurasian countriescountries

Big proportion of employees as shareholders Big proportion of employees as shareholders within joint stock companies created by the within joint stock companies created by the mass privatisation usually doesn't mean their mass privatisation usually doesn't mean their involvement in corporate governanceinvolvement in corporate governance

Employee financial participation exists mainly Employee financial participation exists mainly for high managers in multinational companiesfor high managers in multinational companies

Information and Information and ConsultationConsultation

Employees’ representatives have the right to be Employees’ representatives have the right to be informed before the decision on issues such as the informed before the decision on issues such as the restructuring of the workforce, the relocation of plants, restructuring of the workforce, the relocation of plants, reduced working hours, vocational training schemes, reduced working hours, vocational training schemes, systems of organizing and monitoring work, time systems of organizing and monitoring work, time studies, the setting of bonuses and pay incentives, job studies, the setting of bonuses and pay incentives, job evaluation, or a change in the legal status of the evaluation, or a change in the legal status of the enterprise which would affect staffing levelsenterprise which would affect staffing levels

They have the right to be consulted before decisions They have the right to be consulted before decisions are actually taken on matters of collective relevance are actually taken on matters of collective relevance (( transfers, majortransfers, major changes in conditions, cases of changes in conditions, cases of suspension of the contract of employment or collective suspension of the contract of employment or collective dismissal/redundancy).dismissal/redundancy).

Co-determinationCo-determination In a majority of EU countries, there is a In a majority of EU countries, there is a

statutory system for some form of statutory system for some form of employee representation on the board of employee representation on the board of directors or supervisory boards of some directors or supervisory boards of some types of company. types of company.

Statutory works councils systems based Statutory works councils systems based on legislation or widely applicable on legislation or widely applicable collective agreements exist in 12 EU collective agreements exist in 12 EU members (primary is the German model members (primary is the German model of the betriebsrat)of the betriebsrat)

EU Directives on employees’ EU Directives on employees’ participationparticipation

The European Works Councils (EWCs) Directive (94/45/ECThe European Works Councils (EWCs) Directive (94/45/EC) has ) has introduced pan-European structures for the information and consultation introduced pan-European structures for the information and consultation of employees and their representatives on a range of business and of employees and their representatives on a range of business and employment issues in multinational companies over a certain size employment issues in multinational companies over a certain size operating in the EU; operating in the EU;

The recent The recent Directive (2002/14/EC) establishing a general framework Directive (2002/14/EC) establishing a general framework for informing and consulting employeesfor informing and consulting employees will require all undertakings will require all undertakings with at least 50 employees (or establishments with at least 20 with at least 50 employees (or establishments with at least 20 employees) to provide employee representatives with information and/or employees) to provide employee representatives with information and/or consultation on a range of business, employment and work organisation consultation on a range of business, employment and work organisation issues. issues.

Directives (2001/86/EC and 2003/72/EC),Directives (2001/86/EC and 2003/72/EC), adopted in October 2001 and adopted in October 2001 and in July 2003, provide for employee involvement (through both information in July 2003, provide for employee involvement (through both information and consultation structures or procedures and board-level participation) and consultation structures or procedures and board-level participation) in 'European Company' (Société Européenne) and in European in 'European Company' (Société Européenne) and in European Cooperative Society – the new optional form of Europe-wide company Cooperative Society – the new optional form of Europe-wide company set up under the European Company Statute; and set up under the European Company Statute; and

various Directives have guaranteed information and/or consultation on various Directives have guaranteed information and/or consultation on specific issues, notably collective redundancies , business transfers and specific issues, notably collective redundancies , business transfers and health and safetyhealth and safety

The case of Eurasian The case of Eurasian countriescountries

The Soviet Labour Law has contained detailed The Soviet Labour Law has contained detailed provisions on workers’ participation in the provisions on workers’ participation in the governance of the socialistic enterprisegovernance of the socialistic enterprise

Actually only Kyrgyz Labour Code 1997 Actually only Kyrgyz Labour Code 1997 remains the notion “labour collective” and remains the notion “labour collective” and provides the creation of works councils provides the creation of works councils (chapter 3)(chapter 3)

All Eurasian countries have the possibility to All Eurasian countries have the possibility to obtain the employees’ participation in dialogue obtain the employees’ participation in dialogue with trade unionswith trade unions

What should be doing What should be doing

Provide inclusion into the labour legislation of Provide inclusion into the labour legislation of the norms on employees’ participation taking the norms on employees’ participation taking into account the particularity of the mentality into account the particularity of the mentality

Obtain the coordination between norms of Obtain the coordination between norms of commercial, civil and labour law concerning commercial, civil and labour law concerning corporate governancecorporate governance

Give the possibility de-jure and de-facto to Give the possibility de-jure and de-facto to trade unions present employees in CG trade unions present employees in CG

Promote the voluntary initiative on CSRPromote the voluntary initiative on CSR