Do We Need Employee Representation on the Board of Directors?

Abstract

We develop a model of corporate board including employee representatives in addition to shareholders and top executives. In line with the empirical literature, our model shows that low levels of employee representation may increase the shareholder value, even in the presence of a conflict of interest between employee representatives and other directors because employees hold specific valuable private information. We also show that a minority employee representation may cause the board to switch from a short-term to a long-term strategy. Such a strategy switch is always in the employees’ interest and can be beneficial or detrimental to shareholders as well as top executives. Thus, employee representation can be beneficial to shareholders as well as other stakeholders. However, employee representation may be harmful for firms whose shareholder base has a short time horizon such as venture capitalists.