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Role of employees (trade unions) to ensure

corporate governance


October, 2018

Submitted By: Submitted To:

Karan Shrestha Mr. Resham Raj Regmi

MBAe | Trimester – VIII | Sec - B Course Instructor

Role of employees (Trade Unions) as stakeholders to ensure Corporate Governance

Any organization needs its stakeholders to function smoothly. As defined in its first usage in a
1963 internal memorandum at the Stanford Research Institute, a stakeholder is a member of the
"groups without whose support the organization would cease to exist". Stakeholders are
individuals or groups that have an interest in the success and progression of a company. Internal
stakeholders include silent partners, shareholders and investors. External stakeholder groups might
include neighboring businesses, strategic partners or community bodies such as schools. The role
of the stakeholder varies depending on the organization and the particular project being developed
or decided upon. (Kimberlee Leonard, 2018)

There exist a very special relationship between corporate governance and long-term organizational
performance along with the proper management of all stakeholders involved. Most organizations
focuses their relationship between managers, shareholders or directors. Employees, which itself is
a significant part of any organization is often neglected and overlooked. The ‘human capital’
embodied in the employees, is rapidly becoming the most important source of value for

Regardless, most organizations do not provide the required level of attention to their employees.
Due to this, dissatisfaction and discontent among employees is quite prevalent. As a result,
employees form trade unions to tackle the obstacles levied by the management and voice their
opinion regarding different subject matters which would benefit the employees and increase their
overall welfare. A trade union is an organization made up of members (a membership-based
organization) and its membership must be made up mainly of workers. One of its primary motive
is to protect and advance the interests of its members in the workplace. Most trade unions are
independent of any employer. However, trade unions try to develop close working relationships
with employers. This can sometimes take the form of a partnership agreement between the
employer and the trade union which identifies their common interests and objectives. If a union is
formally recognized by an employer, it can negotiate with the employer over terms and conditions.
This is known as 'collective bargaining'.

Typically, the agreement establishes wages, hours, promotions, benefits, and other employment
terms as well as procedures for handling disputes arising under it. Because the collective
bargaining agreement cannot address every workplace issue that might arise in the future,
unwritten customs and past practices, external law, and informal agreements are as important to
the collective bargaining agreement as the written instrument itself. Collective bargaining consists
of the process of negotiation between representatives of a union and employers (generally
represented by management, or, in some countries such as Austria, Sweden and the Netherlands,
by an employers' organization) in respect of the terms and conditions of employment of employees,
such as wages, hours of work, working conditions, grievance procedures, and about the rights and
responsibilities of trade unions. The parties often refer to the result of the negotiation as a collective
bargaining agreement (CBA).

Another function of trade unions in maintaining a good corporate governance is reducing the
employee turnover rate. Though most employers view trade unions negatively, it has numerous
advantages for themselves as well. Since trade unions enter into collective bargaining for the
betterment of the employees, it ultimately leads to increase in overall employee satisfaction in the
organization. Better wages and salaries, flexible work hours, improvement in working conditions,
etc. which the unions fight for, helps to increase the welfare of the employees which significantly
reduces the turnover rate. As this rate reduces, organizational productivity is expected to rise.

Another actions performed by trade unions are to provide help to its members in needy times, and
improving their efficiency. Trade unions try to nurture a spirit of cooperation, mutual aid and
promote friendly relationships and sharing of knowledge and culture among their colleagues. In
some cases, they also arrange for legal assistance. Besides, these, they undertake many welfare
measures for their members, e.g., school for the education of children, library, reading-rooms, in-
door and out-door games, and other recreational facilities. These activities, which may be called
fraternal functions, obviously depend on the availability of funds, which the unions raise by
subscription from members and donations from outsiders, and also on their competent and
enlightened leadership.

Amongst the various activities performed by trade unions is the betterment of the position of their
members in relation to their employment. The aim of such activities is to ensure that all the clauses
of the hiring and psychological contract are respected. When the union fails to accomplish these
aims through collective bargaining and negotiation, in extreme conditions they adopt drastic
measures in the form of go-slow, strike, boycott, work sabotage etc. to make the management react
and reconsider their requests. Hence, these functions of the trade unions are known as militant or
fighting functions.

A large number of countries around Europe, mostly in the center and north, require some form of
employee participation on the board of directors or supervisory board. The most prominent case is
Germany, which has required half of the seats of the supervisory board of the largest firms to be
taken by employees or union representatives in the largest corporations. Over the decades,
employee participation systems have been a major point of controversy in European corporate
governance and an obstacle to EU company law harmonization. While employee participation
systems lost their allure in the “convergence in corporate governance” period of the 1990s and
2000s, the idea made a significant gain in 2013 when France introduced a requirement for the
largest firms to have employee representatives on the board. Even the UK is now considering the
addition of employee representatives to boards.

Austria, Slovenia, Slovakia and Hungary have implemented a “one-third” participation rule on
supervisory boards, whereas Luxembourg, Sweden, Denmark, Finland and Norway mandate
employee representatives on single-tier boards (e.g. Raiser, 2006, p. 42; Gelter & Helleringer
2015, pp. 1077-1079). Since abandoning its even stronger structure regime in 2004, the
Netherlands permit the nomination of one-third of directors by the works council, which are
subsequently elected by shareholders (e.g. Groenewald 2005, p. 295; de Jong & Roëll, 2005, p.
473). France, that previously mandated employee representation only in firms with considerable
employee share ownership, extended the requirement to firms with more than 5000 workers in
France in June 2013.2 Even the UK considered employee representation in the 1970s, but the
proposal submitted in the “Bullock Report” (Department of Trade, 1977) was not supported by
unions and ultimately failed (Marsh & Locksley 1983, at 50).

Though Germany pioneered labor participation in corporate governance, many European

countries followed suit. However, most other countries do not have provision for such activities
and there aren’t specific laws to support it. Thus, employees being one of the fundamental
stakeholder in any organization, should be able to participate in decision making and maintaining
a good corporate governance. It is only when an organization prospers if its employees are happy
which translates into satisfied customer base.

What Are the Stakeholders' Roles in a Company? Obtained from:

https://smallbusiness.chron.com/stakeholders-roles-company-25029.html by Kimberlee Leonard;
Updated June 27, 2018

Introduction to trade unions https://www.nidirect.gov.uk/articles/introduction-trade-unions

Raiser, Thomas (2006): Unternehmensmitbestimmung vor dem Hintergrund europarechtlicher

Entwicklungen: Gutachten B für den 66. Deutschen Juristentag (München: C.H. Beck).

Gelter, Martin & Helleringer, Geneviève (2015): ‘Lift not the Painted Veil! To Whom are
Directors’ Duties Really Owed?’, University Of Illinois Law Review, pp. 1069-1118.

Groenewald, Edo (2005): ‘Corporate Governance in the Netherlands: From the Verdam Report of
1964 to the Tabaksblat Code of 2003’, European Business Organization Law Review (6), pp. 291-

de Jong, Abe & Röell, Ailsa (2005): ‘Financing and Control in the Netherlands: A Historical
Perspective’, in A History of Corporate Governance Around the World: Family Business Groups
to Professional Managers (Chicago and London: University of Chicago Press; Randall K. Morck
ed.), pp. 467-506.

Department of Trade (1977): Report of the Committee of Inquiry on Industrial Democracy

(London: Her Majesty’s Stationary Office).

Marsh, David & Locksley, Gareth (1983): ‘Capital in Britain: Its Structural Power and Influence
over Policy’, West European Politics (6), Issue 2, pp. 36-60