Corporate Employee-Engagement and Merger Outcomes

1. Corporate Employee-Engagement and Merger Outcomes Hao LIANG, Singapore Management University Luc Renneboog, Tilburg University Cara Vansteenkiste, Tilburg University GCGC Tokyo June 2017

2. Motivations • Corporations represent a nexus of implicit and explicit contracts between shareholders and stakeholders • Employees as important stakeholders matter for firm value • Involved in daily operations • Have contractual claims on firm revenue • Influence corporate decision making and governance • Labor unions, board representations, ESOP, strikes, political lobbying, etc. • How do they matter? • Important questions for managers and policymakers • On-going debate on the roles of shareholders vs. stakeholders in corporate governance Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

3. Motivations • Different views on the roles of employees • Labor as a cost: • Labor maximizes different objective functions than that of shareholders • Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) • Manager-employee collusion(e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

4. Motivations • Different views on the roles of employees • Labor as a cost: • Labor maximizes different objective functions than that of shareholders • Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) • Manager-employee collusion(e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

5. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement Motivations • Different views on the roles of employees • Labor as a cost: • Labor maximizes different objective functions than that of shareholders • Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) • Manager-employee collusion(e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) • Labor as human capital: • Employees are important human capital resources • Employee satisfaction increases labor productivity, thus firm performance (Akerlof, 1982,1984 ; Edmans, 2011, 2012; Edmans, Li, & Zhang, 2015)

6. Motivations • Different views on the roles of employees • Labor as a cost: • Labor maximizes different objective functions than that of shareholders • Strong labor protections entrench employees and constitute substantial costs to shareholders (e.g., Gorton and Schmid, 2004; Dessaint, Golubov, Volpin, 2015; Levine, Lin, and Shen, 2015) • Manager-employee collusion(e.g., Pagano and Volpin, 2005; Cronqvist et al., 2009) • Labor as human capital: • Employees are important human capital resources • Employee satisfaction increases labor productivity, thus firm performance (Akerlof, 1982,1984 ; Edmans, 2011, 2012; Edmans, Li, & Zhang, 2015) Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

7. Motivations • To date, mixed theoretical predictions and empirical evidence • Limited data • The roles of employees vary significantly across countries • Existing studies mostly deal with US or German firms, in which the contracting environment is very unique • We extend the theories of employee incentives and inalienability of human capital (Hart & Moore, 1994; Bolton, Wang & Yang, 2016) • We utilize a newly-assembled dataset on firm engagement in employee-related issues for large companies around the world • Employment quality (compensation, job security, etc.); workforce diversity; workforce health and safety; training and development Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

8. Hypothesis • The inalienability of human capital • Entrepreneurs and employees cannot irrevocably commit themselves to the firm, and their skills are not easily transferable • The benefits and costs of employee engagement depend on to what extent the roles of employees are transferable across firms and environment • The inalienability of employment policies • Frictions in transferring employee-related policies, stemming from inalienability of human capital • Employee engagement can enhance labor productivity & firm value when inalienability is low • Employee engagement can be costly when inalienability is high • Greater uncertainties regarding employee integration and labor contracts during a firm’s restructuring can be counter-productive Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

9. Hypothesis • We focus on takeovers • An event which forces firms to restructure workforce and reallocate assets across firms • A firm’s commitment to explicit and implicit contracts with stakeholders (e.g. employees) play a prominent role in wealth gains and losses • We focus on announcement abnormal returns by acquirer • Since we focus on stakeholder-shareholder relations in terms of shaping firm value • In an efficient market, value change from expected synergy gain is reflected in share price • We focus on two types of takeovers • Domestic v.s. Cross-border • Reflecting different levels of uncertainties regarding employee integration and motivation • Map the inalienability of human capital & employment policies Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

10. Preview of the Results • Among different aspects of employee engagement, employment quality (monetary incentives and job security) is positively correlated with announcement returns • Overall, stronger employment quality is related to higher CARs, but this effect is attenuated if the deal is cross-border • i.e., the correlation is positive in domestic deals, and negative for cross-border deals • Channels: incentives and uncertainties (inalienability) • Effects mostly come from monetary incentives, rather than job security • The attenuating effect in cross-border deals are weaker when uncertainties about employee integration and employment policy consistency are reduced • Repeat acquisition in the same country • Target country is more right-wing oriented • Target country cultures are more incentive-oriented and less union-oriented • Long-run operating performance is consistent with short-run CARs Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

11. Data and Method • Data on employee engagement: ASSET4 (ESG database) • Global coverage of 5,000+ large public companies • We focus on the social pillars (rather than environment and governance) • Raw values and standardized scores (0-100) • Data on takeover deals: SDC • Sample: 2,009 acquiring firms from 48countries engaged in 4,565 M&A deals over 2003-2014 • Key DV: cumulative abnormal returns (3-day CARs) • Labor regulation indices: • Botero, Djankov, La Porta, Lopez-de-Silanes, Shleifer (2004, QJE) • Employment laws index (contracts, dismissal, working hours, etc.) • Collective relations laws index (union power, collective disputes, etc.) • Social security laws index (retirement, death, sickness, unemployment benefits) • Civil rights index Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

12. Data and Method Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

13. Data and Method E E S G S G Employment Quality Health & Safety Training & Development Diversity (Not Human Capital) Note: all scores are industry demeaned (range: 0 to 100 , mean/median = 50) Source: http://www.trcri.com/ Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

14. Descriptive Statistics Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

15. Descriptive Statistics Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

16. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

17. Unbundling Employee Incentives • Mechanism: corporate employee-engagement (esp. employment quality) affects employee incentives & productivity • We decompose Employment Quality score into 2 categories • Monetary incentives • Bonus plan, fringe benefits, employee/CEO wage ratio, etc. • Job security incentives • Trade union relations, new job creation (net of layoff), other job security policy • Matches the dichotomy by Herzberg et al. (1959) – motivational factors vs. maintenance factors Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

18. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

19. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

20. Inalienability of Human Capital and Employment Policies in C-B Takeovers • Mechanism: Cross-border frictions induce uncertainties about employee integration and consistency of employment policies of the merging firms, which exemplify the inalienability of employment policies • Empirical proxies for such uncertainties • Repeat acquisition in the target country • Target country’s remuneration culture (wrtthe importance of “good pay”) • Economic nationalism in the target country (left-wing government) • Strength of labor union in acquirer’s and target’s countries • Low-tech deals (both acquirer and target are in low-tech industries) • Distinct from labor regulation differences • Use Botero et al. (2004 QJE) labor regulation indices Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

21. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

22. Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

23. Other Robustness Tests • Relation between employee-engagement measures and takeover likelihood is economically trivial • IV approach: using peer firms’ (industry-year) average salaries & benefits as IV for the focal firm’s employment quality • Effects are stronger when acquirers have high-level employment quality scores, regardless of targets’ employment quality • Alternative channels – none are significant • Difference in labor regulations between A’s and T’s countries • Geographical distance between A’s and T’s countries • Common language of A’s and T’s countries • Cultural difference between A’s and T’s countries (World Value Survey) • Acquirer’s human rights scores • High Employment Quality score in domestic deal (not driven by over-engagement) • To be done: more refined measures of inalienability (Tate & Yang, 2016) Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

24. Long-Run Operating Performance Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement

25. Conclusions • Corporate employee-engagement, especially employment quality w.r.t. monetary incentives is significantly related to shareholder value during a firm’s acquisition • Employment quality is strongly related to shareholder value, but the effect differs between domestic vs. cross-border deals • Inalienability of human capital and employment policies • Low in domestic deals; high in cross-border deals • The attenuating effect of cross-border is stronger if uncertainties regarding employee integration and consistency of employment policies are greater • Employee engagement has material impact on firm profitability in the long run and is priced by the market Liang, Renneboog, Vansteenkiste (2017) - Employee Engagement