eprintid: 13
rev_number: 22
eprint_status: archive
userid: 30
dir: disk0/00/00/00/13
datestamp: 2016-07-12 14:15:42
lastmod: 2016-11-10 15:24:26
status_changed: 2016-07-12 14:15:42
type: thesis
metadata_visibility: show
creators_name: Razzaq, Arslan Abdul
title: Employee participation in Corporate Governance and
Decision Making: A study of employee perspective
ispublished: unpub
divisions: fac_gbs2
full_text_status: public
keywords: Employees, Decision making, Management, Stakeholders, Employee participation
abstract: Corporate Governance has been a topic of argument since many years and new concepts and theories keep on emerging in order to make corporate governance more effective. There is a current debate going on about participation of employees in the Corporate Governance and strategic decision making not just by giving a seat to employee representative but actually giving the employees, power to influence the decision making. Shareholders are always considered to be the most important stakeholder of the company, but in current globalized environment where not just financial resources are the fuel for success but also knowledge of individuals and their expertise that results in generation of significant returns for an organization and growth in wealth of shareholders. This research is focused on studying the perspective of employees regarding employees participation in corporate
governance and decision making.
date: 2015
date_type: submitted
pages: 72
institution: Griffith College
department: Graduate Business School
thesis_type: masters
referencetext: Employee Participation in Corporate Governance and Decision Making: A study of employee perspective Research conducted and dissertation presented as a requirement of MSc in Accounting and Finance Management Graduate Business School | Griffith College Dublin

Dissertation Completed by: Arslan Abdul Razzaq

Dissertation Supervised by: Dr. Paul Davis 2nd September, Candidate Declaration

Candidate Name: Arslan Abdul Razzaq

I certify that dissertation entitled:

“Employee Participation in Corporate Governance and Decision Making: A study of employee perspective” submitted to pursue the degree of ‘MSc Accounting and Finance Management,' is a result of my own work and efforts and where reference was required, it was provided for the work of others, due acknowledgement is given.

Candidate signature:

Date: 2nd September, 2015

Supervisor name: Dr. Paul Davis

Supervisor signature:

Date: 2nd September, 2015 I

Acknowledgement

This thesis has been completed as result of lots of efforts and time.

I would like to thank my supervisor Dr. Paul Davis for his excellent supervision and supervision techniques, Justin F. Keogan and Aine Mcmanus for development of a base for this dissertation and an understanding of business research methods. Also my thanks go to those who spared their time to share their knowledge and perspectives in order to achieve the objectives of this research.

The research is complete and and objectives are achieved and hopefully the reward is confirmed. II

Abstract

Corporate Governance has been a topic of argument since many years and new concepts and theories keep on emerging in order to make corporate governance more effective. There is a current debate going on about participation of employees in the Corporate Governance and strategic decision making not just by giving a seat to employee representative but actually giving the employees, power to influence the decision making. Shareholders are always considered to be the most important stakeholder of the company, but in current globalized environment where not just financial resources are the fuel for success but also knowledge of individuals and their expertise that results in generation of significant returns for an organization and growth in wealth of shareholders. This research is focused on studying the perspective of employees regarding employees participation in corporate governance and decision making.

Keywords: Corporate Governance, Employees, Decision making, management, stakeholders, employee participation. III

TABLE OF CONTENTS Declaration………………………………………………………………………………………………… I Acknowledgement….…………………………………………………………………………………….. II Abstract…………………………………………………………………………………………………….. III Table of Contents…………………………………………………………………………………………. IV

1. Introduction…....…………………………………………………………………………………………. 1 1.1 Overview……………….………………………...………………………………………………… 1 1.2 Research Background and justification……………………………………………………….... 2 1.3 Research Objectives……………….…………………………………………………………….... 3

2. Literature Review…….……..…………………………………………………………...……………… 4 2.1 Corporate Governance…………………………………………………………………………. 4 2.1.1 Conceptual Models of Corporate Governance (Stakeholder & Shareholder Model)… 7 2.1.2 Need for Governance Framework ……………………………...……………………….. 9 2.1.3 Demand of Employee Participation in Corporate Governance….……………………... 10 2.1.4 Purpose of Corporate Governance..……………………………...……………………….. 10 2.1.5 Importance of Ethics in Corporate Culture………………………………………………... 11 2.1.6 Examples of Corporate Governance issues …………………………...………………… 11 2.1.7 Short History of Corporate Governance…………………………………………………... 12 2.1.8 Combined Code of Corporate Governance………………………………………………. 13 2.2 Employees and their importance………………………………………………………………… 15 2.2.1 Employee Participation in Corporate Governance and Decision Making…...………… 17 2.2.2 Key issues in implementing employee participation……………………………………... 20 2.2.3 International Framework Agreements (IFAs)…………………………………………….. 21 2.2.4 Employee Board Participation in Europe…………………………………………………. 21 2.2.5 Forms of Employee Participation………………………………………………………….. 22 2.2.5 Forms of Employee Participation………………………………………………………….. 22 2.2.6 An insight into background of Employee Participation 24 2.3 Conceptual Framework…………………………………………………………………………… 26

3. Research Paradigm and Methodology ….………………………………………………………….. 30 3.1 Research Paradigm ………………………………………………………………………………. 30 3.1.1 Approach to Research…….………………………………………………………………... 30 3.1.2 Research Methodology……………………………………………………………………… 31 3.2 Research Design.……..…………………………………………………………………………… 32 3.2.1 Research Strategy………..……………………………………………...………………….. 32 IV 3.2.2 Methodology of data collection…………………………………………………………….. 33 3.2.3 Access and ethics of research…...………………………………………………………… 34 3.2.4 Nature of Data…………………………………………………..…………………………… 35 3.2.5 Analysis Technique and Constraints………………………………………………………. 36 3.2.6 Potential Outcomes….……………………………………………………………………… 36

4. Findings of Research...………………………………………………………………………………... 38 4.1 About Corporate Governance………….…………………………………………………………. 38 4.2 Employee Contribution in success…………………………………………………………….…. 39 4.3 Employees as Stakeholders………….. ………………………………...……………………….. 41 4.4 Management practices regarding Employee's importance…………...……………………….. 42 4.5 Incorporation of Corporate Governance in Organization……………………………………... 43 4.6 Employee Participation for better decision making and control……….…...………………… 44 4.7 Intensity of Employee Interest in Decision Making…..………………………………………... 46 4.8 Recommendations on Employee Participation………………………………………………. 46

5. Analysis and Discussion………………………………………………………………………………. 48 5.1 Corporate Governance………….…………………………………………………………………. 48 5.2 Employees as Stakeholders and Contribution in success………………………………….…. 49 5.3 Management's concern over Employees' Importance………………...……………………….. 52 5.4 Corporate Governance for better control over Management………………………………..... 54 5.5 Incorporation of Corporate Governance in Organization..…………………………………….. 55 5.6 Recommendations on Employee Participation……………………………………………….. 58

6. Conclusion…….…………………………………………………………………………………………. 60 6.1 Concluding Discussion………….…………………………………………………………………. 60 6.2 Limitations to research………………………………………………………………………….…. 62 6.3 Contribution of Research……………………………….………………...……………………….. 63 6.4 Recommendations for further research…………………..……………………………………... 63 6.5 Personal Reflection……………………………..………………………………………………… 64 References...……………………………………………………………………………………………… 65 Appendix A - Sample of Interview Questions…………………………………………………………. 70 Appendix B - Interesting Pictures Related to the topic……………………………………………….. 71 V

1. INTRODUCTION

1.1 Overview

Corporate Governance has become an important topic since more than a decade. There is increased public awareness about integrity of the management of companies. Corporate Governance is set of rules of conduct in corporate environment. Corporate Governance Codes set out guidelines that how companies shall be run. It is often argued that Corporate Governance is only a management and shareholder thing which ignores other important stakeholders. Executives of companies state that their primary goal is the maximization of shareholder value; at the same time the importance of employees in organization as stakeholders has also become an important issue as many companies in the annual reports claim to be socially responsible as following the guidelines of Corporate Social Responsibility and claim that their employees are the most valuable assets of the organization but they are ignored when it comes to decision making. It has been argued that employees should also be allowed to participate in decision making and governance system, so that they can speak for their rights and raise their voices on matters like incredible remuneration of directors and other management policies which seem to ignore the rest of the human resource of the company. This research focuses on corporate governance and employee participation. A suitable title for this research would be, “Employee Participation in Corporate Governance and Decision Making - A study of employee perspective”. The topic is moderate and requires the understanding of the Corporate Governance Framework and participation of employees in governance system from the perception of non management level employees.

Corporate Governance has been a topic of argument since many years and new concepts and theories keep on emerging in order to make corporate governance more effective. There is a current debate going on about participation of employees in the Corporate Governance and strategic decision making not just by giving a seat to employee representative but actually giving the employees, power to influence the decision making. Shareholders are always considered to be the most important stakeholders of the company, but in current globalized environment where not just financial resources are the fuel for success but also knowledge of individuals and their expertise that results in generation of significant returns for an organization and growth in wealth of shareholders. This research is focused on studying the perspective of employees regarding employees' participation in corporate governance and decision making.

1.2 Research background & justification:

The reasoning behind choosing this topic for my research is my personal interest in the topics such as Corporate Governance, Corporate Social Responsibility, Decision making, performance indicators and development of my interest in corporate scandals which involved severe failures of governance systems and involvement of third parties. These scandals show how due to dishonesty and poor governance at higher management level is harmful to the stakeholders of the entity specially shareholders and employees. Employees suffer severe consequences after corporate scandals of the entities they work in because they have been serving the company and working hard for its good long prosperous future. Human Resource is the most valuable asset of an organization and without their motivation and good performance organizations cannot achieve their objectives. Employees do not have any investments in their own employing company or outside, their sole reliance is on the organization they work for and they are often concerned about the security of their jobs. At the same time due to watching unethical and unjustifiable motives of their management they also get concerned about their rights within their organization because ultimately they are the ones whose efforts result in the generation of profits for the organization.

I qualified as ACCA (Association of Chartered Certified Accountant) Affiliate and Graduated as Bachelor of Science in Applied Accounting few years ago and during my study I came across knowledge of big corporate scandals like Enron and Worldcom which has increased demand of good governance systems. The other reason is of me being inclined towards this topic is that I have experience of working as Accounts Officer in renowned FMCG Company of Pakistan. Despite of its reputations and being market leader due to high sales volume, there was no compliance with corporate governance guidelines, e.g. separation of Chairman and CEO, and incredibly high remuneration and bonuses were taken by directors while employees were not paid sufficient salaries and benefits etc. I saw lack of motivation in other employees and I also felt it in myself due to these governance needs. I realized if our company was well organized and duties and responsibilities of our management were properly defined and there was some participation allowed to employees in governance system, it would have resulted in a far better position of the company.

So, I believe that this is an excellent opportunity to perform a detailed research myself in this area of Corporate Governance to get an in-depth knowledge of it and how it is perceived by employees of the companies. This would be done by interacting with people who actually work in companies and by asking them about their perception regarding involvement in governance system. Reporting on Corporate Governance Code is mandatory for listed companies and public sector companies in many countries but may not be necessary for private sector.

1.3 Research Objectives

It is compulsory for every research to have clear objectives and strategy to achieve those objectives. Research cannot be performed without clear objectives because if objectives are not clear, a lot of irrelevant data becomes involved which makes the research unviable. Therefore, I have spent some time to refine and finalize my research objectives. This research aims to address and get conclusions out of the following issues:  Do employees recommend their or their representative's participation in board meetings and decision making in order to increase motivation and performance?  What is the perspective of employees in incorporating employee participation which could result in better corporate governance? Can using their knowledge bring about an improved strategic decision making?

 In order to compete in current globalized environment is it necessary to include employee representation in governance decision making?

 Do employees and their knowledge play an important role in running of the organization and hold importance in terms of contribution towards company's growth, success, and profitability?

 Does participation of employees can improve the governance system and increase accountability of the board?

My research objectives are clearly focused on the exploring the point of view employees that how important they consider their involvement to be in corporate governance and strategic decision making and too what extent they believe that their involvement and consultation in strategic decision making and corporate governance will result in employee motivation and better control of the management as one of the main focuses of corporate governance is to provide a better control system for those who run the company i.e. directors. Further I want my research to be clear and beneficial to the one who reads it and it contributes to the knowledge that exists in the context of Corporate Governance. 2. LITERATURE REVIEW

2.1 Corporate Governance

Corporate governance is known to be a set of systems, principles and processes which can be used to govern a company. It guides as to how to direct and control the company so that it fulfills its mission and objectives and also satisfies its stakeholders. Stakeholders might be major or minor holding financial or non financial interest in the company, ranging from board of directors, management, employees, customers, etc. The Corporate governance is completely based upon fundamental ethical principles such as integrity and fairness in doing business, transparency in all types of transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the owners and other stakeholders and strong commitment and grip over business ethics principles (Mary Thomson 2009). There is a strong need that the personal interests of director do not conflict with interests of shareholders and objectives of the company. As discussed by Mary Thomson (2009) the primary stakeholders are often considered as shareholders and employees are ignored in this regard. Employees are also to be considered as one of the primary stakeholders of the company because they play an important part in running of the company. Shareholders have other investment portfolios and diversified risk but for employees their employing entity is the only source of income and they have no other option to diversify risk.

Corporate Governance is something that manages the relationship between owners and stewards. Corporate Governance aims to reduce the negative effects of corporate power (O'Kelly & Wheeler 2012). Corporate governance plays a core role in running of business. It can also be called ‘the way the businesses are directed and controlled, because it talks about the board which is the body that actually runs the organization. It identifies the roles, duties and responsibilities of the board member. Furthermore, it also describes the structure, composition and remuneration of the board. There are some ethical values in the in Corporate Governance framework that need to be observed to proper functioning an organization and fulfillment of the right of owners and other important stakeholders like employees. These ethical aspects relate to; board behaviors, board structures & processes, the purpose, strategy & vision for the business, values & standards, Structure & procedures for oversight & control. (Casson 2013)

Daugareilh (2008) while explained that corporate governance is tied in connection with globalization phenomena. As there was increase in globalization so there was an increase in need for corporate governance framework that can be followed globally. The major aim of corporate governance is to reconcile the diversified interests of individuals in the company and at the same time avoiding any of them using the power unfairly. Shleifer & Vishny (1997) argued that corporate governance deals with methods in which suppliers of financial resources to corporations assure themselves that they get an appropriate return on the investment. The shareholders want to know how their money is being used and is being in proper ways. The integrities of the management can be challenge in many ways as they might abscond with the money using improper use of authorities they are given. Most of the advance economies of the world have solved this governance issue. They have adopted corporate governance principles very well and reduced the gap of control between management and shareholders. Although these advance economies have done well in terms of corporate governance but they have many differences in practical terms. The examples are USA, Germany, Japan, United Kingdom, etc. The argument between these is that what are good and bad mechanisms of the corporate governance. Easterbrook & Fischel (1991) and Romano (1993) made a very optimistic assessment of corporate governance system in United States of America and on the other hand Jensen (1997) and Jensen (1993) showed the belief that governance system of United States is absolutely flawed. There is also a non-stop debate about replacing the old Anglo Saxon corporate Governance system with those patterned after Germany and Japan (Roe 1993)(Charkham 1994). Germany and Japan follow the mechanism of employee participation which allows employees to raise their voices in decision making. For a proper balance of power in the organization and for the alignment of the interests of various stakeholders it should just not be shareholders and directors but employees should also be considered in this regard.

2.1.1 Conceptual Models of Governance (Stakeholder & Shareholder Model)

Over time there are different concepts being developed in the field of the corporate governance. These concepts are based on researches by different researchers and scholars. There are two dominant concepts of corporate governance which are the fundamental choices that are available to an organization. Vitols (2008) highlighted these two fundamental choices of corporate governance conceptions as Shareholder model and Stakeholder Model.

In shareholder model the shareholders come together as an association to form a firm and their main objective is the maximization of the wealth. The firm acquires all types of resources in order to increase the wealth of shareholders. The hired managers and directors of the firm are solely responsible to look after the interests of the shareholders and to increase the value of shareholders' wealth. The other conceptual model of corporate governance is stakeholder model. In this model the firm is actually seen as a community of members who run the company together. Shareholders are just one member of the overall community. The public has an interest in the governance and regulation of the firm and therefore different stakeholders get chances to raise their voices in corporate decision making of the firm. In this way, maximization of profit and firms value is achieved by reasonable balance between all interests of all stakeholders of the firm, not just shareholders (Vitols 2008). Both concepts are very different to each other where shareholder perspective emphasizes the increase in shareholder wealth and the stakeholder perspective encourages equal legitimate objective for the serving of the interest of the employees and other stakeholders such as for shareholders. From the view of stakeholders the participation of the employees seems to be logical phenomenon but from the viewpoint of shareholders it is only beneficial if it benefits the shareholders own interests (Kleinknecht 2015). According to Vitols (2008) shareholder model is most common in United States of America. However, most of the European countries tend to follow the stake holder model. Stakeholder model is the one that looks more towards the employees of the company and takes their interests in account as well. Shareholders have an option to diversify their risk by making other investments but the employees do not possess this ability to diversify their job into different firms, therefore they are more concerned about their job safety and continuity of the firm. Participation of employees in corporate decision making may result in pushing the firm towards risk averse and conservative strategy; due to positive correlation between risk and expected return therefore the effect on profitability would be negative (Kleinknecht 2015). This view is little different where other literatures have explained that allowing employee participation in decision making would result in increased profitability but this one relates it to the relationship between risk and returns.

This debate can go on and on. Roberts & Steen (2000) mentioned two quotes in their research which are most commonly found in all type of publicly made announcements and reports by the managements of the major companies but these quotes at the same time seem to be opposing each other. The quotes are as follows:

“People and knowledge they create are our company's most important assets”. & “Our primary corporate goal is the maximization of shareholder value”

Roberts & Steen (2000) explained later that Shareholder capitalism has become the primary concept in corporate sector of United States and this concept is now even moving into other states where approach had been totally different. In countries like Germany and Japan, the leading executives of corporations are calling others towards the American style of corporate governance if need to compete in the global market has to be fulfilled. At the same time Chief Executive Officers (CEOs) were also claiming that the employees of the company are the most valuable assets of the company and the income generated is a major result of the knowledge brought by employees. Employees are given an opportunity to raise their voices in corporate decision making and thus objectives of the company are achieved through their involvement. On the other side, shareholder model only looks at the shareholders' interest and increase in their wealth. Managers and directors tend to ignore the interests and rights of the employees in order to achieve the confidence of shareholders.

2.1.2 Need for a Governance Framework

Since many years a question has been circulating around the world that how moral values and proper governance can be implemented in a firm. This question has received lots of increasing attention in the literature of business and corporate ethics. The most important issue is that a management system could be developed which is capable of integrating the moral dimensions of all type of economic transactions and questions of ethics and values into the strategies, policies & procedures of the firm. Corporate Governance is a term that is used on global scale but nevertheless, the interpretations of its meaning are not all similar. This has caused large differences in opinion and the causes of divergences are found in different theories; Agency theory - focuses on ownership or control, Transaction cost theory - focuses on allocation of governance to distinct transactions & Organizational theory focuses on rights or responsibilities of the stakeholders (Wieland, 2005).

A firm's corporate governance policy should include guidance on conduct for senior members of the company (CEO, CFO, Directors, etc.) because they are often considered as being exempt from the applicable policies of the company. Investors are mostly interested in the performance, growth and earnings of the company, but bad corporate governance procedures in place might put the investors in a big trouble. One important example of governance failure is ‘Enron', where there were company's management and its associated traders increased the prices of energy artificially to inflate the profit margins and ultimately the share price. While this was not the action that resulted in the fall of company, however there were serious failures in perspective of ethics and internal controls. All of these resulted in the collapse of ‘Enron'. (International Charter, 2012)

2.1.3 Demand of Employee Participation in Corporate Governance

Franca & Pahor (2014) explained that recent developments in human resource management, corporate governance and labour laws which extremely emphasize on the recognition of the employees as important and major stakeholder group of a company. In addition to this there is a lot of emphasis upon incorporation of the system of employee participation in organizations as way of giving employees and employee representatives an opportunity to collaborate with higher management in decision making. There is a prevailing opinion that employee participation in decision making affects the performance of the company positively. Corporate Governance has mainly focused on the relationship between shareholders and directors and tends to ignore the involvement of the company in running of the company. Employees are also affected by decisions that are made in board rooms and they have right to cast their vote in the decision making.

2.1.4 Purpose of Corporate Governance

According to Rossouw (2005) corporate governance is destined to make sure that companies take the responsibility of directing and controlling their situation in such a manner that it seems fair to the stakeholders of the company. There are two ways in which this responsibility can be taken: Either board of directors of the company can voluntarily take the responsibility or regulatory authorities can enforce this responsibility or both of these can combine for this purpose or The stakeholders, to who board of directors are accountable, can use their influential power. But some difference of opinions found in different corporate governance regimes regarding the scope of stakeholders; as some regimes limit them exclusively to shareholders only and some other corporate governance regimes include many other stakeholders who fall within the circle of corporate responsibility. Now that this is established that corporate Governance is crucial for good governance in any type of organization, but this cannot be denied it has to be kept up to date and also spaces for improvement should be looked upon. Many researchers have found that participation of employees in decision making results in better governance of the company and improved performance as well. Corporate Governance is all about accountability of directors to shareholders. It provides guidelines on how board should be composed in order increase control over management. But if employees or an employee representative are also participating in board meeting and decision making, this would result in improved control over management (Brickey, 2003) as it increases their accountability.

2.1.5 Importance of Ethics in Corporate Culture

Casson (2013) explained that the key to long-term success for a business depends upon decisions made within the scope of ethical values and principles. The losses and impingements of the high profile corporate scandals of greed and misconduct have proven the necessity of business ethics for an entity. These scandals involved by senior officers who violated ethical principles and as well as the rules of laws. Business ethics is the application of ethical principles and values in business practice. It mainly focuses on this point that decisions taken by board of directors should ultimately benefit the interests of shareholders and other stakeholders, no one shall be deprived of his/her right. Casson (2013) also defined accountability as the board being accountable / answerable to the stakeholder for both financial performance and non-financial performance of the company, and they are also answerable about how they achieved the performance.

2.1.6 Examples of Corporate Governance issues

Osterloh & Frey (2003) highlighted some recent major governance issues in the corporate sector. A good example is Jack Welch of General Electric who received $2.8 million as basic salary, a bonus of $7.2 million and 261.5 million US dollars in stock options. Michael Esner of Disney, made another good example of exorbitant salary, i.e. 0.8 million US dollars as salary, 5.0 million US Dollars as bonus and made 107.2 million dollars in stock options. On the basis of an average, the income earned by the high level managers of the 10 companies of highest eminence in United States, such as Coca-Cola, Chevron, American Express, Boeing or Merck, stood at $76 million in stock options, $3 million in bonuses and 1.3 million in basic salaries.

The well-known examples of corporate scandals are WorldCom, Enron and Xerox. CEOs of these companies who tampered the accounts of the companies at the same time also received incredible remunerations. The scandals not only just damaged the entities themselves but the market as a whole and thousands of employees suffered the consequences who were working for a long lasting future of the companies. There was massive fall in the prices of the stocks and therefore investors have lost trust in the managers. This caught attention particularly of politicians and scholars. Their suggestions were in relation to extra monitoring and sanctioning of management at both management level and the level of laws and regulations. (Osterloh & Frey 2003)

2.1.7 Short History of Corporate Governance

In USA, since late 1970s many different bodies like Securities & Exchange Commission, New York Stock Exchange, etc have continuously issued codes of corporate governance. Hong Kong Stock Exchange also issued its code of best practice in 1989. In 1991 the Irish association of investment managers drafted ‘statement of best practice on the role and responsibility of directors of publicly listed companies', in 1991. In these years the codes gained a rapid growth and in 1992, Cadbury Committee Report: Financial Aspects of Corporate Governance in Uk was published. The Cadbury Report became a major guideline of Corporate Governance and Business ethics. According to paragraph 2.1 Cadbury report (Cadbury, 1992) it was issued because very low confidence of stakeholders in financial reporting and also the competence and integrity of the auditors. The Cadbury Report also stressed upon the need of independent non-executive directors, more involvement of shareholders, and the setting up of board committees including both executive and non-executive directors (Charkham & Simpson 1999). It was also required that companies that trade shares on stock exchanges ensure compliance with the code or otherwise provide justifications in case of non-compliance. The recommendations of Cadbury Report were highly codified and it enabled stakeholders and companies to adopt best practices as well as it became a base for code issuers in other countries (Aguilera & Cazurra 2004).

Sarbanes-Oxley came out after the event of Enron in 2001. Brickey (2003) explained that on October 16, 2001, Wall Street was stunned when Enron made the announcement of net loss of $618 million dollars for the third quarter and it is going to cut down the shareholder equity by $1.2 billion. Very next day Securities and Exchange Commission issued an inquiry and written requests were made to the officers of Enron to provide the details of information. Enron informed of the issue to its auditors, Arthur Anderson and after few days Enron engagement team of Arthur Anderson including engagement partner began destruction of related documents. After this, officers of Enron and Arthur Anderson were convicted of financial crimes and investigation continued. Sarbanes Oxley Act was enacted in order to correct the systematic weaknesses in Corporate Governance structures. It addressed the issues of improvement in accounting oversight, auditor independence, transparency, eliminating conflicts of interests and requiring greater accountability of officials.

2.1.8 Combined Code of Corporate Governance

The decisions taken by the leaders / top management have significant impacts on shareholders, customers, suppliers and other stakeholders. Therefore, top management must play a vital role in the bringing up of members of organization in terms of ethics and moral values, by setting up a model example of ethical behavior by themselves. Leaders are those who shape the culture of the organization. Therefore they must ensure their ethical and moral values to be sufficient enough to avoid big corporate scandals in future (Thoms 2008).

Mallin (2010) has outlined the main requirement of Combined Code in relation to the Directors and Board which are as follows:

- The board of the company should be effective and collectively responsible for the performance of the company - At the top of the company, there should be a clear division between the roles and responsibilities between the board running and role of running the company's operation and business. Chairman should only be responsible for running of the boards and Chief Executive responsible for the day to day running of the company. - The board should have a balance of executive directors and non-executive directors (NEDs). Executive have involvement in the business but NEDs only interfere in decision making in important matters. - There should be a formal, rigorous and transparent procedure to be followed when to comes to the appointments of executive directors. - The board of directors should go through formal and rigorous performance evaluation every year to measure its own performance and other board committees. - Re-election of directors should be held at regular intervals.

Combined code also demands formation of sub-committees which are pointed out by (Padgett 2012) as follows:

- Audit Committee plays the most important role in the group of sub committees. The Audit Committee has to ensure the fulfillment of the interests of shareholders in terms of, proper implementation of internal controls, financial reporting, appointment of statutory external auditors. - Remuneration Committee is the one that decides the remuneration of directors and is of particular interest to the investors. The code requires that there should be at least three NEDs in the remuneration committee. - Nomination Committee is responsible for the appointment of new directors. Majority members of the nomination committee should be NEDs. Nomination committee should be capable enough to evaluate the existing balance of skills, knowledge and experience required to act as a director of the company.

2.2 Employees and their Importance

There is no doubt in the fact that employees are one the most important part of an organization and their performance really does matter in achievement of organizational goal. Déniz-Déniz & Saá-Pérez (2003) in their research discussed the importance of the employees in an organization in much detail. They explained that in a ferociously competitive environment in which the economic activities are taking place, people are becoming increasingly important and also the way they are managed. This phenomenon is reflected in the adoption of highly committed practices of the human resource management which supports the development and creation of highly motivated and qualified people who are committed to the organization and organizational goals. Therefore, it is a fact that the manner in which the company devises its responsibilities to its employees will have an effect on their performance in their work and also affects their loyalty to the company; a satisfied and motivated worker who is committed to the company will become a society's best image of the company. Some light was put upon a fact by Armstrong & Sweeney (1994) that although there are legal and regulatory requirements for organization in order to ensure equal rights (gender rights) and work safety to employees, but still organizations need to take further actions in this area if it wishes to treat in employees in such a distinctive way that it becomes distinguished from other organizations. Therefore, just following legal requirements and regulations, it does not actually mean that the social responsibility towards employees is fulfilled but there is a lot more that needs to be done in this regard. It means that company's need to adopt a managerial philosophy in which employees are not seen as a cost which has to be reduced but instead employees should be considered as an asset which needs to be valued and looked after. Thus taking HR seriously means a greater commitment to employees. The adoption of system of high commitment to employees can be seen as an initiative taken by management which aims to increase the profitability and performance of the organization through employee involvement and participation. In the increasing salient discussions of human resource management, high commitment systems are one the key elements. The use of these high commitment practices has an immediate effect upon the intermediate results, such as productivity and staff turnover rate which are under the direct control of the employees. Lower staff turnover and high productivity together should improve the financial results of the company (Déniz-Déniz & Saá Pérez 2003).

Campbell & Campbell (2001) in their research looked for the factors of staff turnover. The factors included were, dissatisfaction with the work, style of supervision, or work-group dynamics; unmet expectations regarding pay, training and promotion, personal factor, employment opportunities in other organizations. Also in this research, it was demonstrated that employee turnover is not simply an individual's decision i.e. typically not a single stay or go determination, but in fact, it Wis very complicated process. This decision is usually triggered by some sort of dissatisfaction.

According to Shadur et al. (1999), a key to achieve increased organizational effectiveness and positive employee perceptions is employee involvement which is for a long time considered as one of the most important aspects of organizational life. An assumption has been held by many managers and academics that, “if employees are adequately informed about matters that concern them and they are allowed to make decisions relevant to their work, then there will be benefits for both the organization and the individual“. On the other side, if sufficient information is not given to the employees and also work is given where there is little or no interaction at all with fellow employees, then it is unlikely that employees will be able to carry out their work with required level of satisfaction. It was further elaborated by Shadur et al. (1999) that perception of the employees regarding the matter of involvement in organizational climate and factors that contribute to these perceptions are of significant importance to researchers and practitioners.

Déniz-Déniz & Saá-Pérez (2003) highlighted that the ultimate reason behind including the stakeholders in the process of strategic planning would be to gain the trust of stakeholders, because this trust generate commitment and commitment in turn result in guaranteed efforts. High trust has many benefits associated with it such as lower agency costs and transaction costs and a high capacity for adaption, cooperation and commitment. The commitment towards the stakeholders should br a priority of the organization when it is focusing on its employees, since the trust and loyalty of this group not only benefits the company but also the employees themselves. Due to an increase in global competition and advancement in complex technology, companies depend more than ever on the trust of its employees, specialists and managers, etc. Therefore, the trust of employees is an element of strategic stability and when this trust would disappear, implementation of strategy would have to go through slowly and costly mechanisms and behavioral rules. Therefore, in conclusion to this argument, by development of long term relationships with primary stakeholders of the organization such as present and future employees, customers, suppliers, etc firms expand the set of value creating exchanges with these primary stakeholder groups beyond what would have been possible with the interaction that are limited to the transactions of market (Hillman & Keim 2001).

2.2.1 Employee Participation in Corporate Governance and Decision making

Gollan & Ying (2015) in their research cited Heller et.al (1998) who explained the meaning of employee participation in their pioneering work that the term employee participation refers to how employees become able to raise their voice over working activities and organizational decision making issues of organization within the organization in which these employees work. It has been insisted by some of the authors that employee participation must be a group process, which involves group of employees and their boss; delegation is also stressed by some, the process by which the one individual employee is given more authority or greater freedom to make decision on his or her own. Some authors have restricted the term ‘participation' to formal institutions like worker councils; other definitions of employee participation embrace ‘informal participation', which is the day-to-day working relation between subordinate and their supervisors and in this case subordinates are allowed and authorized to make substantial input into decision of work. Finally there are some of those authors who stresses that participation is a process and those who are concerned with participation are as results.

It was further argued by Gollan & Ying (2015) that these different forms of participation differ to each other in scope of decisions, the influence that employees can practice over management and the level of organization at which decisions are being made. Some of these forms of employee participation are designed in such a way that these can give voice to the employees, but it's not more than a very modest role in decision making, at the same time other forms are designed in order to give employees a more significant involvement in the governance system of the organization.

Marchington & Wilkinson (2005) differentiated employee participation into three different categories; upward problem solving, direct communication and representative participation. The first two categories i.e. upward problem solving and direct communication are mostly between managers/supervisors and their staff employees and these often operate as face-to-face interactions. Some of these are formalized with written information and suggestions while others take form of informal verbal participations. The third form of participation that is representative participation which centers on the role that employee representatives or trade union representatives play in formal discussions between management and the workforce via mechanisms such as joint consultation or joint working parties. Roberts & Steen (2000) highlighted various issues which were related to the statements made by the higher management executives of the companies. On one side the companies mention their primary objective to increase shareholder value and at the same time CEOs of the companies also in their reports to public and shareholder claim that the employees of the company are the most valuable assets of the company because it is their knowledge and hard work which actually runs the company and generate profits and wealth. Also that knowledge that is embedded inside the heads of the people, who work in the company, is one of the major competitive advantages of the company which it has over its competitors. Phillips (2006) explained that managers of corporate entities are not just in search of corporate governance words but they want to bring it more into their day to day operations. Organizations although have different stakeholders but somehow some of them seem to be much more significant to other stakeholders. They also cited Galbreath (2006) who found that firms do make investments on stakeholders according to priority basis that which stakeholder has more power gets more invested into and internal stakeholders are normally given more priority as compared to the external stakeholders. Therefore, the good relations with staff and better human resource management is a form of good corporate governance and results in organizational success. Good management of human resource also impacts on brand equality, corporate reputation, ethical leadership and corporate citizenship. Pettijohn et al. (2001) and Thorpe & Homan (2000) suggested that in organizations which are run upon the basis of stakeholder model of corporate governance, the acceptability and quality of decision making is improved by allowing the participation by employees where employees can share their perspectives.

According to research by Young & Thyil (2009) it was explained that since more than a decade, corporate governance has become increasingly important following the involvement of firms serious frauds and corporate scandals including higher management, governance failures and bankruptcies. Along with this the need for a role of employees in governance systems was also emphasized and highlighted by researchers in different models of governance. Employees are the most important and valuable asset of the company. The employees of the company are affected by decisions of management and they can as well affect the governance system of the company. Employees have often been considered as part of the labor but never as part of the corporate governance. It can be seen as employees as altogether actually run the company and their role in corporate governance is of high importance. Osterloh & Frey (2003) argued that the organizations should intensify the participation and self-governance of employees in the decision making process as a necessary part of the corporate governance. Eccles (1993) pointed out the assumption underlying the participation of workers in decision making that the resulting decision making where employees also participate will be of higher quality than the decision making in which management were the primary decision makers. It was further stated that advocates of higher involvement of employees or employees' participation assume that by allowing employee participation better decision may be made because employees at the lower level of the organization are better able and knowledgeable to gauge what should be done in order to solve the problems. In addition to this, lower level employees will be better motivated to solve the problems of the organization and also they will remain closer to the customers. It is thought that these factors lead to the high involvement organizations and these type of organizations are also facilitated by the organization that allow their workers to participate on active basis in decision making.

Daugareilh (2008) in his research emphasized that: “Decision making, instead of being the property and in the power of any individual or group, must be the result of an ongoing negotiation amongst the social players, seen as partners in a great game, where the playing field may be a company, a state, or an organization.”

Kluge & Schömann (2008) discussed the importance of presence of an employee representative in board decision making. The representation of workers at board level constitutes a different approach to the management of the company because the presence of the employee representative in the board meetings would demand consideration and explanation of social consequences and justifications from the outset. Therefore in order to make the participation of employees effective in the board decision making, this practice should form an essential component of company's governance policy to allow for more partnership-oriented corporate culture opposed to Anglo-Saxon understanding of the management that is hierarchical and more top-down decision making.

Jones & Pliskin (1988) also explained that participation of workers in decision making might be another source for an additional improvement in company governance. Fitzroy & Kraft (1987b) who stated that workers in participatory firm might exhibit more cooperative behavior which would reduce the costs in relation to the monitoring of workers and they concluded that participation of workers in corporate decision making and financial sharing with workers would reinforcing effects on productivity and it would result in better performance of the company as a whole and effective governance.

2.2.2 Key issues in implementing employee participation

Franca & Pahor (2014) the literature is almost silent about the impact of management on implementation of employee participation. A key issue regarding the employee participation in board decision making is designing a desirable and appropriate model for introduction and implementation of employee participation in corporate decision making of the company. The influence of employee depends also on the type of company and the legal environment in which company operates. In European Legislation there is speeding up of legal and mandatory participation of employee representative in board meetings. Franca & Pahor (2014) also cited Strauss (1992), who highlighted that legal arrangements requiring companies to introduce employee participation in management do in fact increase the influence of the employees and cited Rebhahn (2004) saying that legal arrangements for employee participation restrict management's exclusive right and influence management. In terms of how important is the role of employees in decision making the legislation cannot be clear on that, in fact, it completely depends upon the perception of management about the employees. If employees and the employee representatives are considered as a significant resource to the company, then employee participation would be more influential. On the other side if management is not in favor of the employees then employee participation is merely useless.

2.2.3 International Framework Agreements

Kluge & Schömann (2008) have briefly explained the evolution of International Framework Agreements (IFAs) which enhanced the employee interest representation by complementing labor relations and workers' interest representation at global level in large number of MNCs. These agreements, together with participation guaranteed by legal authorities, are increasingly becoming a core feature of the culture of global companies. Although when we first look at Corporate Governance, it seems to be focused only upon the management of shareholders, but employees / workers also have legitimate claim. Interests of workers are not just restricted to the employment contracts but they are also investors in pension funds and employee shareholders who deserve rights to good quality of service and benefits like citizens of state. They are also consequently affected by the corporate decisions.

2.2.4 Employee Board Participation in Europe

In most of the European countries employees participate in corporate decision making through statutory work councils (SWC) and employee board level representations (EBLR). There are a lot of contrasting material and contradictory predictions available in the extensive literature on the economic effects of EBLR and SWC (Kleinknecht 2015). This concept of employee participation is one of stakeholder models of corporate governance which conflicts with the concept of shareholder model where the main objective is the maximization of shareholders wealth. Gold (2011) explained the evolution of Employee Board Level Representation (EBLR) in Europe. In 1970s, EBLR was only common in Germany. In France, workers were allowed to represent in consultative capacity on the board in 1946. Later, in 1983 and 1986, the law required employees' representations on the board by state owned companies and private companies respectively. In 1970s these systems were also introduced in Netherland, Denmark, Sweden, Austria and Luxembourg but not implemented in a way such as in Germany. EBLR is restricted to state owned entities in Ireland, Greece, Portugal and Spain. It was never obligatory in countries like Italy, Belgium and UK; however there was an attempt to introduce EBLR in UK in 1970s.

According to Gold (2011) in the majority of European Union member states Employee Board Level Representation is of crucial importance in industrial relations. In his research Gold (2011) concluded that the employee representation at board level contributes in formulating a Corporate strategy with broader base and ensures that the interests of employees and labour are taken into account at an early stage.

2.2.5 Forms of Employee Participation

There are many ways in which employee participated can be incorporated in the company. Knudsen (1995) explained that there are several forms of employee participation that can be found in organizations and all of these can be simplified in two forms; direct employee participation and indirect employee participation. Gonzalez (2010) and Kester & Pinaud (1998) also explained direct participation implies the participation of a single employee (employees representative) or group of employee in the process of decision making and this participation is related to their workplace and their area of responsibility. In opposition to this system, indirect employee participation system, gives the power to the employees to nominate or elect their representative or a group of representatives of employees such as work councils, As compared to direct participation, which is normally does not appear in laws and regulations, indirect participation has formed part of legal requirements in most of the European Union countries. There has been a lot of emphasis in European Union documents to incorporate employee participation in decision making (Franca & Pahor, 2014).

Direct participation at its maximum influence may occur as self-management at the operational level in the organization. These decisions are normally related to stronger job performance, but decisions at strategic level are irrelevant in direct participation. Indirect participation can also be called representative participation (which is more related to this topic, i.e. participation in decision making), it often implies influential role of employees in decision making at tactical level in the form of consultation or co-decision making and may even include an influential role in strategic decisions relating to production goals, investments and cuts, etc. As discussed earlier in Germany and Scandinavian countries, employees can influence strategic decisions making process by representations on the board of directors (Busck et al. 2010).

Gonzalez (2010) explained that the participation of worker in decision making in their workplaces is defended by three different angles: democratic arguments as to power up the sharing and the protection of economic interests of employees; (II) humanistic arguments that refer to increased expectations of workers as to the nature of work in terms of autonomy and self-realization; and (III) economic arguments mostly in terms of enhancing the efficiency of the firms. Gold (2005) highlighted that employee participation in decision making is considered a productive factor in itself; for an instance, performance can be enhanced by improving employeesánd their representative union's understanding of the business and also their commitment to the business.

2.2.6 An Insight into background of Employee Participation Langan-Fox et al. (2002) highlighted that employee participation was first introduced as an alternate approach when traditional management approaches were no longer considered adequate after recession of 1980s. It was defined as ‘a conscious and intended effort by individuals at higher level in an organization to provide visible extra role or role-expanding opportunities for employees or groups of employees at lower level in the organization, to have a greater voice in one or more areas of organization performance' (Glew et al. 1995).

Langan-Fox et al. (2002) in their research explained that momentum was gained by interest of employee participation in 1970s as an initiative to increase the work life quality in organizations. In current time, it is clear that the primary aim of employee participation is to increase organizational efficiency and competitiveness. The recession in 1980s as told earlier forced many organizations to downsize and restructuring. The hierarchical structures that had characterized the early 1980s were dropped, and elimination of middle management was carried out at large scale. While, increased competitiveness in labor market meant a fall in market share and there was a lot of pressure than ever before to boost up the quality of products and services with minimization of cost. The strain on labor-management relations supported for the realization of the fact that traditional approaches to management were no longer adequate and a desire for search of an alternative management approach was evolved. And one of these alternatives was employee participation. 2.3 Conceptual Framework

The completion of literature review leads to the development of concept that needs to be used in the coming stages of the research. After I have completed the search for literatures on my topic and reflected the related areas in my literature review such as concept of Corporate Governance, its importance and history, then different models of corporate governance, and current debates on bringing employee participation in corporate governance, importance of employee participation and how employee participation can lead to better governance, also there are different methods of incorporating employee participation in corporate governance system. All of this has lead to the development of a conceptual framework that I shall apply in my research, findings and results, discussions and conclusion. Corporate Governance Employee Participation -Improved Decision making -Set of rules within org. -Control on management -Employees importance -Management control -Employee motivation in organisation -To ensure director's -Company Performance -More knowledge accountability -Cost savings -Right to know -Better performance -Management's claim's -Protect shareholders -Stakeholders right fulfillment Comparison Comparison Conclusions Research and Analysis (Interviews, Findings and Discussion) Figure 1: Research Illustration The literature review, theoretical framework and conceptual framework share 5

same functions; to build a foundation, to demonstrate that how knowledge can be advanced by a study, to provide a basic concept for the study, for assessment of research design and instrumentation, and to provide a reference point for interpretation of findings (Merriam & Simpson 2000).

Cresswell (2003), while explaining conceptual framework, emphasized that testing theory does not have to be starting point of a qualitative empirical study, instead qualitative research often explores the areas that are studied lesser and searches for an emergent theory.

Rocco & Plakhotnik (2009) described that conceptual framework relates the concepts, empirical research and relevant theories in order to advance arrange the knowledge of different concepts and theories in a systematic way. Miles & Huberman (1994) describe the conceptual framework as a tool for research which identifies the main areas of study and focus such as factors, concepts, theories or variables and all these can be incorporate into data analysis and answering of research questions.

Therefore, the basic concepts for this research document are corporate governance and employee participation. According to the literature, first it was defined that what corporate governance is set of procedures that can be used for better governance of a company. It provides better control over the management and provides guidelines to shareholders that how they can structure the company in order to ensure the security of their investment (Mary Thomson 2009). Further it was developed that corporate governance is becoming more important as globalization is increasing. Its popularity has brought attention of many researches towards it and plenty of literature can be found on corporate governance. Many countries like USA, UK, Germany and Japan have best corporate governance systems in place but they differ on their mechanisms. There are many literatures which speak in favor of different mechanisms. There are two main types of governance models which are being adopted by the organizations; stakeholder model and shareholder model. In US shareholder model is found more dominating however in Germany, Japan and many European countries the stakeholder model is more emphasized even through law (Daugareilh 2008). Different opinions of researchers are found on corporate governance systems adopted by big economies. Such as Easterbrook & Fischel (1991) and Romano (1993) praised the governance system of United States and on the other (Jensen 1993) believed the system of United States to be completely flawed.

According to literature review that there are two types of models of corporate governance system explained by Vitols (2008) which are normally adopted by companies. Shareholder model is where the primary objective is to maximize the wealth of shareholders but stakeholder model also considers the interests of other important stakeholders such as employees as a primary objective. Roberts & Steen (2000) argued about the debates going on in great economies like USA, Germany and Japan about which model of corporate governance shall be adopted. The concept that develops here is that there are two different governance models and there is difference of opinion that which of these is more beneficial because these model are adopted by best of economies. This research also aims to identify that what type of governance system is preferred by employees of the companies' themselves.

Different papers such as Wieland (2005) emphasized the importance of governance framework for companies so that management system could be developed which is capable of integrating the moral dimensions of all type of economic transactions and questions of ethics and values into the strategies, policies & procedures of the firm. And Franca & Pahor (2014) also emphasized the importance of employees as major stakeholders and encouraged the incorporation of employee participation in corporate governance systems. Casson (2013) emphasized upon the ethical and moral values that need to adopt in corporate culture in order to stay away from corporate scandals. Directorsáccountability was also emphasized in this article. This research is aimed to identify that incorporation of employee participation in decision making can improve accountability of directors. There is a great debate about employee participation in the decision making of the company and incorporation of this mechanism in corporate governance systems and guidelines. Roberts & Steen (2000) argued that executives of the companies in their reports mention that their most important asset is the human resource whose knowledge and effort has resulted in company's success but in reality their interests are not looked after. It was highlighted by Pettijohn et al. (2001) and Thorpe & Homan (2000) that by allowing employee participation in the company the quality and acceptability of decision making is improved when employees share their perspectives. Kluge & Schömann (2008) and Jones & Pliskin (1988) also discussed the importance of employee participation in decision making. Fitzroy and Kraft (1987b) explained workers participation could result in cost savings by better corporate behavior by employees which would save monitor
citation:   Razzaq, Arslan Abdul  (2015) Employee participation in Corporate Governance and Decision Making: A study of employee perspective.  Masters thesis, Griffith College.   
document_url: http://go.griffith.ie/13/1/Arslan_Abdul_Razzaq_2866803.pdf
document_url: http://go.griffith.ie/13/8/bibliography.txt