Employee Representation on the Board, Firm-Specific Skill Investments and Firm Performance : Evidence from Germany and the United States

This paper studies how governance practices within and across national boundaries – specifically employee representation on the board – impact firm performance. Based on the property rights view of the firm, we propose that the relationship between employee representation on the board and firm performance depends on the requirement of firm-specific skill investments by the firm’s employees. We construct an innovative measure of firm-specific skill intensity for firms across different industries using rich labor survey data. We then assemble a sample of German and U.S. firms that are subject to different regulatory environments and compare different levels of employee representation within Germany, and between Germany and the U.S., We find that employee representation on the board has a relatively higher positive impact on the performance of firms in industries that require relatively more firm-specific skill investments. We further find that conditioning on firm-specific skill intensity, medium levels of employee representation are associated with better firm performance than high levels of employee representation