Board-Level Employee Representation and Firms' Responses to Crisis

We hypothesize that companies with board level employee representation (BLER) should experience a lower probability of crisis-induced dismissals than other firms. Theoretically, we link this effect to the employee directors’ ability to reduce the in-formation asymmetry and moral hazard in employee-employer contracting, thereby facilitating the implementation of labor-cost adjustments that are an alternative to workforce dismissals. We confirm our hypotheses by analyzing the behavior of Scandinavian public corporations with/without employee directors during the Great Recession. We show that BLER associates with significantly lower performance-sensitivity of employment cuts during the crisis period. In these firms, the lower likelihood of employment reductions was in part ensured through alternative measures providing for a reduction of the labor costs per employee.