Better Firm Performance with Employees on the Board? Not in the Long Run

The employee stakeholders have a lawful right to board representation in Norway. In this paper, I explore the direct and indirect effects of employee directors upon firm performance in a panel of all non-financial Norwegian listed firms from 1989 to 2002 using the fixed effect estimation methodology. I set up a simultaneous equation estimation model with a board index constructed from board characteristics and the leverage as governance mechanisms, using lagged firm performance, employee directors, firm size, and firm risk as exogenous variables. The model tests include the overall sample and sub-samples of co-determined and shareholder determined firms, and in robustness tests the stock return and the accounting return on assets replace Tobin's Q, and the dividend payout rate in place of the leverage. The negative employee director association with firm performance comes out very clearly. Reverse causation running from the lagged firm performance to the board index is confirmed, while shareholders' compensatory actions to neutralise the employee director influence, is clearly visible. Overall, the paper rejects beneficial effects of one group of stakeholders, the employees, on company boards