Employee Participation Rights in Corporate Governance: An Economic Rationale, a Test of a Leading Theory, and Some Initial Policy Proposals

This paper examines roles of mandated employee participation rights (EPRs), such as works council legislation, in corporate governance. Links between employment and corporate relationships are stressed. Market failure arguments are developed, predicting that EPRs, and the interaction between EPRs and investments in skills, can positively impact productivity; preliminary evidence from German establishments is generally supportive. A qualitative appraisal concludes that EPRs have not harmed economies that adopt them. Policies to expand EPRs in the US are introduced, jointly encouraging skill development and employee decision-making participation, full rights for employee stock ownership plan (ESOP) participants, legal regulation of terms such as “participation,” and EPR extension services.