A company with worker representatives on its board of directors will cut pay and lay off employees less often than companies that don’t, while offshoring fewer jobs and producing more product that leads to larger payrolls, according to a new study from the University of Iowa.

The study finds that when their duties as board members conflict, worker representatives are more apt to place a priority on payroll maximization, sometimes at a cost to their monitoring duty. 

“They behave like they are supposed to,” says Cristi Gleason, professor of accounting in the Tippie College of Business and study co-author. “They really are workers on the board, and they represent workers.”

Gleason says the study is important because corporate governance reform has become a more serious topic for consideration in recent years. Liberal political leaders especially believe that requiring worker representatives on oversight boards will make corporations more sensitive to worker rights.

Theoretically, Gleason says workers’ representatives are expected to increase good governance by reducing extreme earnings management and tax aggressiveness. But she says workers’ representatives often face a contradiction between their role as board members to monitor earnings to build firm value and their incentives as workers to maximize payroll and protect jobs.

The research team analyzed the financial reports of publicly-traded German companies, where federal law requires corporations of a certain size to appoint workers to up to half the seats on their oversight board. By comparing board decisions of companies with more than 500 domestic workers—which are required to have workers’ representatives on their boards—to the decisions of boards with less than 500 domestic workers—which are not—they were able to see workers’ impact on board decisions.

The study focused on how boards managed earnings and taxes to see what affect it had on corporate decisions. What they found was:
--boards with worker representatives tend to block tax strategies and fail to promote tax planning when the risk of offshoring jobs is higher. Gleason says this is consistent with the idea that workers on corporate boards maximize payroll for workers when tax transactions impact payroll and job security.
--however, workers tend to be more effective monitors when pay increases and monitoring duties are aligned, suggesting a more nuanced cost-benefit tradeoff to including worker representation on the board.
--boards with worker representatives cut less administrative spending, which could lead to layoffs or pay cuts.

Gleason’s paper, “Monitoring or Payroll Maximization? What Happens When Workers Enter the Boardroom?" was co-authored with Sascha Kieback, Martin Thomsen and Christoph Watrin and was presented at the Review of Accounting Studies Conference.