*2.2. Employee Representatives*

As stated in the Public Companies Act, the main rule regarding employee representation in Norway is that one third of the directors can be elected by and among the employees. NUES (2018) do not mention any specific recommendations regarding employee representatives since they are considered ordinary members of the board with the same authority and responsibility as the shareholder-elected board members. Literature and prior studies on employee representatives and earnings management is however rare. In Fauver and Fuerst (2006) study on German companies, they argue that employee representatives contribute as informed monitors with detailed operational knowledge that is valuable in board decision-making and supervising. They further conclude that the presence of employee representatives on the board is negatively and significantly related to earnings management. Other studies on monitoring and earnings management have found that better monitoring quality by directors could ultimately help to reduce agency costs induced by either managers or large shareholders (Gul et al. 2002; Peasnell et al. 2005). The importance of operational knowledge is supported in a Chinese study conducted by Chen et al. (2015). They found that the quality of managerial oversight by directors depends significantly on the quality and completeness of the information they receive, stating that directors' monitoring is more effective in a richer information environment. Accordingly, the second hypothesis is:

**Hypothesis 2** (**H2**). *There is a negative relation between the presence of employee representatives and earnings management*.
