1. Employees as Stakeholders: The Challenges of Building an Ownership Culture Dr. Demir Yener Yener Global Finance Associates Third OECD South Eastern Europe Corporate Governance Round Table Zagreb, Croatia 21-22 November 2002

2. Purpose of the Presentation To discuss: The role of stakeholders The role of stakeholders The role of employees The role of employees The role of culture in progress The role of culture in progress The implications of culture on Corporate Governance The implications of culture on Corporate Governance The challenges of employee ownership The challenges of employee ownership

3. Culture and Politics “The central conservative truth is that culture, not politics, determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself.” Daniel Patrick Moynihan, US Senator, NY

4. What’s Culture? Culture is the… Values Values Attitudes Attitudes Beliefs Beliefs Orientations Orientations Underlying Assumptions Underlying Assumptions that prevail among people in a society. that prevail among people in a society. Samuel Huntington

5. Major Issues in the Culture Paradigm (Lawrence Harrison) 1. The linkage between values and progress 2. The universality of values 3. Geography and culture 4. The relationship between culture and institutions 5. Cultural changes

6. Stakeholders and Shareholders Primary Stakeholders Shareholders Shareholders Boards of Directors/Managing Boards Boards of Directors/Managing Boards Executive Management Executive Management Other Stakeholders Managers Managers Employees Employees Customers Customers Community at Large Community at Large Suppliers Suppliers Financial Markets Financial Markets Environment in general Environment in general

7. Enabling Environment International Auditing & Accounting Standards (IAS&ISA)International Auditing & Accounting Standards (IAS&ISA) Securities Markets Legal and Regulatory Frameworks (IOSCO)Securities Markets Legal and Regulatory Frameworks (IOSCO) Financial Sector Participants : investors, issuers, intermediaries (interaction between participants)Financial Sector Participants : investors, issuers, intermediaries (interaction between participants) Financial Market Infrastructure and ArchitectureFinancial Market Infrastructure and Architecture Product and Factor CompetitivenessProduct and Factor Competitiveness Foreign Direct InvestmentsForeign Direct Investments Corporate Control (Corporate Governance: OECD Principles)Corporate Control (Corporate Governance: OECD Principles) Enabling, prudentially regulated business environment, with creative incentive structureEnabling, prudentially regulated business environment, with creative incentive structure Enabling Environment International Auditing & Accounting Standards (IAS&ISA)International Auditing & Accounting Standards (IAS&ISA) Securities Markets Legal and Regulatory Frameworks (IOSCO)Securities Markets Legal and Regulatory Frameworks (IOSCO) Financial Sector Participants : investors, issuers, intermediaries (interaction between participants)Financial Sector Participants : investors, issuers, intermediaries (interaction between participants) Financial Market Infrastructure and ArchitectureFinancial Market Infrastructure and Architecture Product and Factor CompetitivenessProduct and Factor Competitiveness Foreign Direct InvestmentsForeign Direct Investments Corporate Control (Corporate Governance: OECD Principles)Corporate Control (Corporate Governance: OECD Principles) Enabling, prudentially regulated business environment, with creative incentive structureEnabling, prudentially regulated business environment, with creative incentive structure Factors of Sound Corporate Governance Shareholders rights protectionShareholders rights protection Rights and responsibilities of Board of Directors and ShareholdersRights and responsibilities of Board of Directors and Shareholders Quality of DisclosureQuality of Disclosure MonitoringMonitoring Effectiveness of the core management functionsEffectiveness of the core management functions Factors of Sound Corporate Governance Shareholders rights protectionShareholders rights protection Rights and responsibilities of Board of Directors and ShareholdersRights and responsibilities of Board of Directors and Shareholders Quality of DisclosureQuality of Disclosure MonitoringMonitoring Effectiveness of the core management functionsEffectiveness of the core management functions Principal Factors StakeholdersStakeholders Takeovers/acquisitionsTakeovers/acquisitions Bankruptcy frameworksBankruptcy frameworks Collateral and Foreclosure rulesCollateral and Foreclosure rules Enterprise RestructuringEnterprise Restructuring Investor and CreditorsInvestor and Creditors Agents: ManagementAgents: Management Principal Factors StakeholdersStakeholders Takeovers/acquisitionsTakeovers/acquisitions Bankruptcy frameworksBankruptcy frameworks Collateral and Foreclosure rulesCollateral and Foreclosure rules Enterprise RestructuringEnterprise Restructuring Investor and CreditorsInvestor and Creditors Agents: ManagementAgents: Management External Elements of Corporate Governance Internal Elements of Corporate Governance

8. Four Values of Good Corporate Governance Transparency Transparency Accountability Accountability Responsibility Responsibility Fairness Fairness

9. Efficient Ownership Sufficient concentration concentration of control control in a firm by owners to be able to monitor monitor and influence influence management effectively.

10. The Goal of the Firm To maximize maximize the wealth wealth of its shareholders.

11. Role of Employees  As stakeholders  As owners

12. Cultural Obstacles to Employee Ownership Feudal Culture Feudal Culture Investor Culture Investor Culture Participatory Culture Participatory Culture Shareholder Culture Shareholder Culture Entrepreneurial Culture Entrepreneurial Culture (Blasi and Kruse, 1991)

13. Challenges in Building Employee Ownership Culture 1. Technical 2. Psychological 3. Ideological 4. Structural

14. Challenges in Building Employee Ownership Culture 1.Technical Challenges Circumstances about employee ownership Circumstances about employee ownership Legal framework Legal framework Adequate understanding of financial and managerial issues and constraints of operating a business Adequate understanding of financial and managerial issues and constraints of operating a business

15. Challenges in Building Employee Ownership Culture 2.Psychological Challenge Resistance to changes Resistance to changes Democratic consensus building Democratic consensus building Referenda Referenda Top-down autocratic process Top-down autocratic process

16. Challenges in Building Employee Ownership Culture 3.The Ideological Challenge Political questions about the possible and desirable aspects of property concept Political questions about the possible and desirable aspects of property concept Justice is the foundation for Patrimony Justice is the foundation for Patrimony The cultural and legal sense of ownership seek to balance between: The cultural and legal sense of ownership seek to balance between: Organizational: rights & responsibilitiesOrganizational: rights & responsibilities Economic: Risks and rewardsEconomic: Risks and rewards

17. Challenges in Building Employee Ownership Culture 4.Structural Challenges Ownership culture involves the technical, psychological and ideological issues around power, authority and accountability. Ownership culture involves the technical, psychological and ideological issues around power, authority and accountability. The institutional frameworks that will serve the needs of employee owners and shareholders The institutional frameworks that will serve the needs of employee owners and shareholders Mechanisms and elements of CG Mechanisms and elements of CG

18. Conclusion Employees play an important role as stakeholders and shareholders in CG Employees play an important role as stakeholders and shareholders in CG Culture has an important role to play in development and progress Culture has an important role to play in development and progress Four important cultural challenges (Technical, Psychological, Ideological, Structural) impede employee ownership Four important cultural challenges (Technical, Psychological, Ideological, Structural) impede employee ownership Cultural impediments to ownership must be overcome in order for employees to become more effective owners and stakeholders Cultural impediments to ownership must be overcome in order for employees to become more effective owners and stakeholders