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This paper reviews the conflicts of interests introduced by employee participation in the governance of a firm and how these can be constructively resolved by introducing a division of power between investors and employees and/or between management and workers. Case studies reveal that non-trivial sustainable employee control of industrial firms are dependent upon establishing a compound board to separate, mediate and resolve conflicts of interests. Internal competition for control through a compound board is identified as an alternative to external competition for control through the stock market as a way for maintaining firm efficiency. The failure to introduce a compound board is identified as the reason for insider participation in governance reducing rather than increasing investor returns and jeopardizing the viability of employee owned firms as demonstrated in transitional economies. The paper concludes that the problem will spread in advanced nations as tax incentives increase employee ownership with unitary boards.

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