Corporate governance and employee power in the boardroom: An applied game theoretic analysis

• The study investigates employee representation on corporate boards.
• We apply power indices from game theory to examine the actual power of employees.
• The employees’ power in the boardroom affects firm performance inversely U-shaped.
• Moderate employee participation in corporate decision-making can enhance firm-value.

The debate on employee representation on corporate boards has received considerable attention from scholars and politicians around the world. We provide new insights to this ongoing discussion by applying power indices from game theory to examine the actual voting power of employees on boards and its effect on firm performance. Based on unique panel data on the largest listed companies in Germany, we find an inverse U-shaped relationship between labor power and Tobin's Q. Moderate employee participation in corporate board decision-making can enhance firm value.