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When labor representatives join supervisory boards: empirical evidence of the relationship between the change to parity codetermination and working capital and operating cash flows

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Abstract

We examine how the change to 50% labor representation on German supervisory boards is related to working capital and operating cash flows, since both are proxies for short-term financial policies. We expect the change to be associated with reduced working capital and increased operating cash flows. Using a difference-in-differences model, we compare a sample of listed and non-listed firms that changed to parity codetermination between 1987 and 2014 with two different groups of control firms that did not change their level of codetermination. In line with our hypotheses, the results suggest that a change to parity codetermination is related to lower working capital and higher operating cash flows compared to our control firms. We conclude that firms begin to engage in more efficient working capital management due to the change to parity codetermination on supervisory boards. We also conclude that the positive short-term effects on the firms’ operating performance imply that labor representatives do not bear just the interests of employees in mind, but also those of other stakeholders.

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Change history

  • 01 November 2017

    In the original publication of the article, the Section no. 4 has to be named as “Hypotheses Development” instead of “Literature Review”.

  • 01 November 2017

    In the original publication of the article, the Section no. 4 has to be named as ���Hypotheses Development��� instead of ���Literature Review���.

  • 01 November 2017

    In the original publication of the article, the Section no. 4 has to be named as ���Hypotheses Development��� instead of ���Literature Review���.

Notes

  1. In the following, we use also other expressions to refer to parity codetermination such as “50% codetermination”, “labor representation on supervisory boards” as well as “board level employee representation”.

  2. “Control firms” are separated into two different Control Groups, with Control Group I consisting of firms with less than 50% labor representatives on their supervisory boards and fewer than 1900 employees in the period 1987 to 2014. Control Group II consists of firms that had to adopt codetermination since their headcount was well above the threshold of 2000.

  3. For German limited companies (GmbH) a supervisory board is mandatory if they have a domestic headcount of over 500 (Section 1 (1) of the One-Third Participation Act).

  4. For an overview of legislation on board-level employee representation in Europe, we refer to Conchon (2011).

  5. If no majority is achieved, labor representatives elect the deputy chair while shareholder representatives elect the chair (Section 27 (2) of the Codetermination Act).

  6. The One-Third Participation Act does not apply to the legal form Societas Europaea.

  7. Sick and Pütz (2011) show that between 2006 and 2010 the number of SEs in Germany with more than 2000 employees and no parity codetermination rose from 10 to 19. Between 2006 and 2010 the number of firms with more than 500 employees and no labor representatives on the supervisory board increased from to 26 to 43.

  8. Current practical and anecdotal evidence shows that half of all German firms that come under the One-Third Participation Act do not give labor representatives one-third participation rights and do not even have a supervisory board due to a legislative gap in the One-Third Participation Act (FAZ 2016).

  9. According to Section 84 Section (1) of the German Stock Corporation Act, the supervisory board shall appoint the members of the management board for a period not exceeding 5 years.

  10. These firms do not have a supervisory board of their own and thus do not report supervisory board data.

  11. Out of 323 firms, 261 firm-years (untabulated) firms temporarily had more or fewer than 2,000 employees but did not change their level of codetermination. Of these, 154 firms fell below this threshold (but only 15 firms reduced the level of codetermination). Out of 169 firms that crossed the threshold, 47 changed to parity codetermination.

  12. We sort the list of control firms (Control Group I) in descending order by distance (in matching variables) to the treated firm’s outcome in matching variables in the following order: SIZE, ROA, LEVERAGE. We keep only the first two firm-year observations to form the final matching pair. We repeat this with Control Group II and the treated firms in order to form two-to-one matching pairs.

  13. Moreover, we apply matching sensitivities and linear regressions in a large sample without any matching (referring to Sect. 6.5) to prove whether the results are robust.

  14. For the WZ03 industry classification sectors A–Q, please see https://www.destatis.de/DE/Methoden/Klassifikationen/GueterWirtschaftklassifikationen/klassifikationwz2003englisch.pdf?__blob=publicationFile.

  15. For NACE (Rev.1.1), please see http://ec.europa.eu/eurostat/ramon/nomenclatures/index.cfm?TargetUrl=LST_NOM_DTL&StrNom=NACE_1_1&StrLanguageCode=EN&IntPcKey=&StrLayoutCode=HIERARCHIC.

  16. The variables are defined in Table 7.

  17. Furthermore, we find evidence of a significantly negative relationship between parity codetermination and working capital when ROA was positive in the pre-period. However, when the financial performance was negative, the effects on working capital are insignificant. This may either be caused by the firms’ inability to obtain bargaining advantages vis-a-vis customers and suppliers, or by a lack of firm-year observations. Tables are available upon request.

  18. Data on the presence of labor representatives on supervisory boards is hand-collected for firms that reached the threshold of 2000 domestic employees between 1987 and 2014.

  19. The results are presented in Table 8 in the Appendix.

  20. Tables available upon request.

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Authors and Affiliations

  1. Carl von Ossietzky University Oldenburg, Ammerländer Heerstr. 114-118, A5, Room 2-245, 26111, Oldenburg, Germany

    Kerstin Lopatta, Katarina Böttcher & Reemda Jaeschke

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  1. Kerstin Lopatta
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  2. Katarina Böttcher
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  3. Reemda Jaeschke
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Correspondence to Katarina Böttcher.

Additional information

We gratefully acknowledge the comments and suggestions of two anonymous reviewers and participants of the 2015 VHB meeting in Vienna, Austria (May 2015).

In the original publication of this article Section no. 4 has to be named as ‘‘Hypotheses Development’’ instead of ‘‘Literature Review’’; this error has now been corrected.

Appendix

Appendix

See Tables 8, 9, 10, 11, 12, 13 and 14.

Table 8 Linear regressions
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Table 9 Control Group I and financial crisis
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Table 10 Matching sensitivities
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Table 11 Placebo test 1 year before the treatment event
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Table 12 Additional analysis—financial performance
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Table 13 DiD regressions using standard-error clustering
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Table 14 Main regressions using raw data and truncating
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Lopatta, K., Böttcher, K. & Jaeschke, R. When labor representatives join supervisory boards: empirical evidence of the relationship between the change to parity codetermination and working capital and operating cash flows. J Bus Econ 88, 1–39 (2018). https://doi.org/10.1007/s11573-017-0860-x

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