The contribution of work representation to solving the governance structure problem

The aim of this paper is to explain in what ways work representation may contribute
to an efficient governance structure. The insights from institutional economic theories
will be applied to two different kinds of employee participation, namely trade unions
and works councils. From the discussion it follows, that the latter may be better
equipped than the former to play an effective role in corporate decision-making,
owing to its specific institutionalisation. The paper concludes with the finding that
works councils could fulfil an important economic function, by protecting the interests of the employees as well as those of the shareholders.
Several agency problems can be solved. By giving the workers consultation and codetermination rights, this will reduce their dependence on unilateral decisions by the management and may stimulate them to be more cooperative, leading to greater
productivity and less monitoring costs. By giving the workers information rights, the
management becomes more disciplined as well. Because contrary to trade unions the
works councils usually do not determine the terms of employment, the owners of the
firm do not need to fear that the employees will be able to extract a portion of the
firm’s profits.