The Modern Firm, Corporate Governance and Investment
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The Modern Firm, Corporate Governance and Investment

Edited by Per-Olof Bjuggren and Dennis C. Mueller

This book explores the revolutionary development of the theory of the firm over the past 35 years. Despite rapid progress in the field, new developments in the microeconomic and industrial organization literature have been relatively scant. This book attempts to redress the balance by providing a comprehensive overview of the theory of the firm before moving on to examine firms and the organization of their economic activities. The contributors also investigate the impact of ownership structure and board composition on firm performance and study how the institutional framework of an economy affects investment decisions.
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Chapter 13: Better Firm Performance with Employees on the Board?

R. Øystein Strøm


R. Øystein Strøm* 1. INTRODUCTION This chapter deals with the impact of co-determination1 upon firm performance. Two conflicting views on the benefits of co-determination exist. One says that co-determination increases firm performance, either because employee directors supply outside directors with information they would otherwise not have access to (Freeman and Reed, 1983; Blair, 1995), or because co-determination is a safeguard against dismissal, inducing employees to invest in firm-specific human capital (Zingales, 2000; Becht et al., 2003). The other view is that owners’ and employees’ interests are not aligned, and therefore allowing employees into the boardroom means that conflicting goals are pursued. When decision makers with different objectives share in the board’s decisions, its focus may become unclear (Tirole, 2001), its decision time longer (Mueller, 2003), and its decision quality inferior.2 The prediction is that firm performance will be lower than it could otherwise be. Even though co-determination is important in many European countries,3 few firm-level studies have been made of its firm performance impact. This chapter is an attempt to bring more academic research to the still under-researched (Goergen, 2007) comparison of firm performance in shareholder determined companies and co-determined companies. Earlier studies give mixed results, showing a negative impact in German firms (Fitzroy and Kraft, 1993; Schmid and Seger, 1998; and Gorton and Schmid, 2000, 2004), Canadian (Falaye et al., 2006), and Norwegian (Bøhren and Strøm, 2008), but a positive impact in a later German study (Fauver and Fuerst, 2006). Compared with former literature, the...

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