The stock market and human resource management: evidence from a survey of French establishments

1. The stock market and human resource management: evidence from a survey of French establishments Corinne Perraudin (CEE, CES) Héloïse Petit (CEE, CES) Antoine Rebérioux (EconomiX) 22 May 2008, Paris EAEPE International Conference "Governing the business enterprise: ownership, institutions, and society"

2. Does corporate governance matter for employment? Empirical approach that uses micro-data on French business enterprises. Deep transformation of the French corporate governance system over the last decade.

4. % of equity capital held by non-residents for French listed and non-listed companies (Thesmar and Thoenig, 2004).

5. The French model of CG • Rise to power of institutional investors (mutual funds and non-resident pension funds) • Changes in financial market law and corporate law: greater protection for minority shareholders • Increasing sensitivity of managers to the interests of minority shareholders and stock market valuation

6. Relations between CG and HRM (1) • VoC approach (Hall and Soskice, 2001; Black, Gospel and Pendleton, 2007) : macro-institutional complementarities between the stock market and the labour market • Qualitative case-studies of changes in HRM for listed companies, in the UK (Deakin, Hobbs, Konzelmann and Wilkinson 2006) and in Germany (Jackson, Höpner and Kurdelbusch, 2005) • Differentiation of HRM practices according to whether or not the company is listed and the extent to which its equity capital is held by financial investors ?

7. Relations between CG and HRM (2) • In a capitalist system, every company has to achieve a level of financial returns at least equals to the cost of capital. But beyond this level ? • The increasing role played by the stock market in CG strengthens the requirement for financial returns • EVA = (ROE – k) . EC ROE = R / EC R : net result = total income – total cost EC : book value of equity capital k: cost of capital (CAPM)

8. Delaveau et du Tertre, 2007

9. Relations between CG and HRM (3) • HRM might be used to maximise net result and ROE. Yet two opposite strategies: • “Low road” (Hutton 1995; Porter 1997) : short term financial requirements may result in a cost cutting-oriented approach to HRM. As labour costs are the main component of operating costs, they offer the most direct leverage to increase net profits. • “High road” : investments in human capital through high wages and training expenditures, to increase total income over the long run.

10. Relations between CG and HRM (4) • HRM might be used to control the variations of ROE. • Indeed, any “destruction” of shareholder value (0<ROE<k) runs the risk of provoking a fall in the price of the shares. Hence, a prominent effect of stock market pressure is to strengthen the damaging consequence in case of poor (short term) profit. • Listed companies might seek a greater flexibility for their costs, and in particular for labour costs: • Use of flexible forms of employment (fixed-term contracts, temporary agency workers and subcontracting) • Use of flexible pay practices: individual or collective bonus schemes

11. Hypothesis • Stock market listing and the penetration of financial funds in equity capital might influence HRM at three different levels: • Increasing needs for flexibility • Level of wage • Training expenditures

12. Empirical analysis (1) • French data-base that merges together a representative survey on HRM (REPONSE 2004-2005) and an administrative source that provides information on the mean wage in the establishments. Source: REPONSE 2004/2005, DARES

13. Empirical analysis (2) • Assess the influence of listing and of the identity of main shareholders on a broad range of HRM practices • Estimation methodology: OLS, dichotomous logit and multinomial logit • Extensive set of controls: • Establishment characteristics: sector, size (number of employees and total income), establishment age, etc. • Competitive environment: market share, predictability of demand, the state of the market over the last few years, etc. • Characteristics of the workforce: the structure of occupational groups, the proportion of employees aged under 40 and the proportion of women

14. Empirical findings (1):use of temporary work arrangements • Strong tendency to resort to agency workers or subcontractors among listed companies but weak use of fixed-term labour contracts

15. Empirical findings (2): pay practices • Being listed distinctly increases the probability of using individual and collective bonus schemes for all type of employees, specially when non-resident financial funds are the main owners

16. Empirical findings (3):wages and training • Wage levels, both average and median, are higher in listed companies, as well as levels of training expenditures: wages and training do not follow a rationale of cost minimisation within listed companies

17. Conclusion (1) • Flexibility. Stock market listing is associated with a strong search for cost flexibility, through the use of bonus schemes and the use of commercial contracts. • Limited core group. Listed companies tend to maintain the workforce around a relatively limited core group of employees: the negative effect of listing on the use of fixed-term (employment) contracts as well as the reluctance to hire over the last three years are evidence of this strategy. • “High road” strategy. Listed companies adopt an offensive (high road) strategy for HRM. However, this commitment to human resources is concentrated on a relatively limited number of long-term core employees, isolated through the intensive use of commercial contracts.

18. Conclusion (2) • These findings are in line with the conclusions reached by Jackson, Höpner and Kurdelbusch 2005) in their monographs of German listed companies. ‘Shareholder friendly’ companies tend to: • Fall back on a stable core of employees • Increase the level of mean wage • Generalize the use of bonus schemes • British case is quite different: Conway, Deakin, Konzelmann, Petit, Rebérioux and Wilkinson (2007) find no evidence of the “high road” approach to HRM in listed companies.