Worker Representation on U.S. Corporate Boards

Lenore Palladino is Assistant Professor at the University of Massachusetts at Amherst. This post is based on her recent paper.

For the last four decades, large corporations in the United States govern themselves according to the model of shareholder primacy. The economic theory underpinning shareholder primacy is that shareholders are the sole corporate stakeholder who makes a risky investment; therefore, the maximization of shareholder value is defended as the sole goal of corporations, and management agents owe allegiance only to the shareholder principals. As it stands, workers have no part in making the decisions that determine the future of the corporation they work for: who to hire and how to compensate a CEO, whether to merge or acquire another firm, what kind of shareholder payments to authorize, and a wide variety of other key decisions.

My paper, Worker Representation on U.S. Corporate Boards, argues that workers should have representation on corporate boards of directors and explores the policy choices in the U.S. economy of the 21st century to achieve the goal of worker representation on corporate boards. Effectively implementing such a reform requires consideration of key issues, including: how many corporate directors should represent employees; how they should be chosen and who counts as a worker when the choice is made; how they should meaningfully represent workers, and what information the board owes the workforce; how these choices are different in a unionized or non-union context; and the relationship between a worker’s role as director and employee, in terms of pay, time, and protection from repercussions at work.

Prominent challenges to shareholder primacy have recently appeared. The Business Roundtable issued a new “Statement on the Purpose of a Corporation” in August 2019, declaring that the purpose of the corporation is to “deliver value” to an expansive list of stakeholders, including shareholders, employees, customers, suppliers, and communities (Business Roundtable 2019). Several pieces of federal legislation have been introduced granting employees the right to sit on corporate boards of directors (Warren 2018; Baldwin 2019). This paper will consider how workers representation on corporate boards—a key part of stakeholder corporate governance—would work in the 21st century American economy. Though worker representation on boards, or “codetermination,” is common and largely successful in Germany and other Western European countries, it is critical to consider how stakeholder governance could work in a uniquely American context, with low levels of unionization in the private sector and without a tradition of “works councils” at the enterprise level.

Though labor law reforms are necessary to allow workers freedom in their choice to unionize or not, labor law reform alone ignores the potential for corporate governance reforms to empower workers in a different way. Even if workers are unionized, unionized employees cannot bargain with their employer over any issues beyond their terms and conditions of employment under the National Labor Relations Act (NLRA). The “zone of entrepreneurial control” is currently reserved exclusively for management, but worker representation on corporate boards will give workers a voice in board-level decisions.

While corporations can voluntarily include workers on their boards of directors, the assumption is that federal legislation would be required to mandate that all large corporations include workers on their boards of directors. States can adapt their corporate law, but any corporate law reform that includes workers on boards becomes necessarily entangled with federal labor law. Thus, a federal legislation solution to mandate worker representation on corporate boards is required. Several legislative vehicles have recently proposed a requirement for worker representation on corporate boards at the federal level. The Reward Work Act proposes that workers elect one-third of board seats. Similarly, the Accountable Capitalism Act mandates that 40% of board seats be elected by employees and requires that large companies acquire a federal charter that beholds them to all stakeholders. This paper serves to address the implementation questions that would become relevant were these statutes to become law.

Corporations are social institutions embedded in a political context that shapes the markets and democratically determines the rules of corporate behavior through the political process. Economic arguments for worker-directors include normative claims that workers should have voice and instrumental claims that voice will improve corporate productivity. Decision-making should be shared among the various stakeholder groups that contribute to corporate success through stakeholder representation on the board. Workers serving on corporate boards are able to participate in business decision making and create greater visibility and consideration for the effects of those decisions on workers. Freeman & Lazear (1995) find that increased worker voice can allow more effective information transfer from board to worker, which reduces monitoring costs, creates motivation for workers, and promotes convergence of interest between shareholders and employees. Participation may further encourage employees to take a longer time-horizon view of the firm and increase firm-specific investment.

Workers are crucial stakeholders for the success of large corporations, the drivers of the U.S. economy. The model of shareholder primacy should be replaced with a stakeholder theory of the corporation. In the stakeholder model, workers should elect and serve in substantial proportion on the corporate board of directors. There are many procedural and substantive questions that will arise if the general policy is adopted, and this paper lays out some of the major questions and a range of policy solutions available. The challenges of actually implementing such a policy should not stand in the way of such a common-sense and fundamental reform that is necessary—though insufficient on its own—to rebalancing power within the corporation and ensuring long-term economic and social prosperity.

The complete paper is available here.

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