The principle of shareholder primacy dominates corporate law in the United States. Not only do shareholders form the sole voting group within the corporate republic, but they can also demand that the business be run to further their interests alone. Indeed, under the current norms of corporate governance, failure to maximize shareholder wealth is a violation of a board’s fiduciary duties. Stakeholder theory—in which corporate leaders are expected to consider the interests of all participants in the enterprise—has long served as a foil to shareholder primacy, but despite its good intentions has never coalesced into a coherent approach that would meaningfully change the structure of corporate power.
If we are to correct the deep-rooted power imbalances within our economic institutions, we need to go to the source—the governance of corporations—and adopt more equitable arrangements. Luckily, there is a solution hiding in plain sight. While widely ignored in the United States, codetermination is a time-tested, theoretically sound approach to corporate governance with an impressive track record in many other countries. As such, it deserves a spot on the agenda for progressive economic reform to facilitate a more equal, more participatory economy.
A Thriving Tradition
Codetermination is premised on the sharing of governance power between workers and investors at the highest levels. Perhaps most importantly, this system empowers employees to elect some portion of the company’s board of directors. While codetermination has served as a stable and equitable foundation for corporate governance in many European countries, Germany is the most well-known example, blending a strong union movement, local works councils, and supervisory codetermination. Under German corporate law, larger corporations are required to allow workers to choose either a third or half of the seats on their supervisory boards.
Recent empirical research has demonstrated some of the strengths of codetermination as a method of governance. As one might expect, employees are better protected under codetermination, with higher wages and stronger job security. But German workers also have taken steps to cut their own pay during downturns in order to preserve jobs. This willingness to sacrifice in the interest of the collective is one reason that the German economy was able to endure the 2008 Financial Crisis better than most countries (including our own). There is, moreover, no evidence that codetermination negatively impacts other stakeholders, such as shareholders, creditors, and the environment—in fact, codetermined firms have generally offered stronger long-term protections for these groups.
Despite this impressive record, codetermination has not gained much traction in U.S. academic or policy circles. When the law and economics takeover of corporate law scholarship was first underway, codetermination was seen as more of a threat and treated as such. Compared with shareholder primacy, codetermination was seen as kludgy, wasteful, and vaguely corrupt. Shared governance, it was claimed, muddled the clarity of the exclusive shareholder franchise, which enabled the corporation to focus single-mindedly on shareholder wealth maximization. Under law and economic principles, if worker participation in governance were truly better, firms would adopt it voluntarily. “It is questionable,” said Roberta Romano in The Genius of American Corporate Law, “whether such worker representation provisions enhance shareholder value. If they did, one would expect U.S. states and firms to opt for such arrangements.” In their (in)famous 2001 essay “The End of History for Corporate Law,” Henry Hansmann and Reinier Kraakman cast codetermination as the defeated competitor for global corporate law dominance. Sizing up the state of play, they wrote: “The growing view today is that meaningful direct worker voting participation in corporate affairs tends to produce inefficient decisions, paralysis, or weak boards, and that these costs are likely to exceed any potential benefits that worker participation might bring.” In the most melodramatic version of the conflict, Michael Jensen and William Meckling predicted that codetermination would either disappear, bowing to the supremacy of shareholder primacy, or it would grind economies to a halt like Tito’s Yugoslavia (their words), with “fairly complete, if not total, state ownership of the productive assets in the economy.”
Some forty years later, Jensen and Meckling’s prediction looks laughable, as codetermination seems, if anything, more firmly ensconced in the global economy. More to the point, there are a number of reasons why corporations in the United States may not voluntarily adopt codetermination. Since shareholders currently call the shots, they may resist codetermination if they think, rightly or wrongly, that they would lose out (even if their losses would be outweighed by gains to others). There may also be collective action problems that would disadvantage an adopting firm in relation to its competitors. And, finally, current systems of corporate law and ownership structures are so deeply embedded in existing businesses (and the people who run them) that they may be resistant to change. For these reasons, the impetus to shift to codetermination may very well need to come from outside the corporation.
On the legislative landscape, no state has seriously considered a codetermined system since Massachusetts enacted a voluntary statute in 1919 (that’s still on the books). But there are signs of change. At the federal level, Senators Elizabeth Warren and Tammy Baldwin have both introduced national codetermination legislation, and Senator Bernie Sanders defended the system against the absurd charge of “communism” from former NYC Mayor (and billionaire) Michael Bloomberg during a 2020 Presidential debate. The failures of the existing paradigm rooted in shareholder primacy are becoming clear across the board: massive income inequality, dislocated multinational firms acting without accountability, alienation from work, and a disregard for anything beyond shareholder returns.
Claiming Corporate Power for Workers
It is time to consider a systemic overhaul for corporate governance. While stakeholder theory asks shareholders and their representatives to consider a broader set of interests, it leaves our current corporate governance machine untouched. If we want to reform corporate governance in a meaningful way, we need to change the underlying power structure. Changing the academic and public conversations would be an important first step.
To bring codetermination into the fold as a viable approach to corporate structure, legal scholarship must break out of the assumption that shareholder primacy is the only available framework. Classes in Corporations and Business Associations need to discuss codetermination alongside such favorites as Dodge v. Ford and eBay v. Newmark. And scholars should build upon the work of Kent Greenfield, Lenore Palladino, Brett McDonnell, and Ewan McGaughey, each of whom has significantly moved the conversation forward. More broadly, we need more faculty and students—from law, political science, economics, public policy, and political economy—to ask about, pay attention to, and seek out research on worker participation in corporate governance.
Progressive policymakers should include codetermination in their collections of economic reforms. To be sure, there are important questions about the potential for the system in the absence of certain institutional and economic conditions, such as robust union representation, sectoral bargaining, and works councils. But the inverse may also be true—the rest of the worker-power infrastructure may need codetermination to remain viable. Without worker participation in governance, companies can and do lobby for anti-worker legislation, discourage workers from joining unions, permanently replace striking workers in the interests of their shareholder polity, and view workers as simply an input into the production function. The relationship between codetermination and other forms of worker power mustn’t paralyze us into inaction; instead, we should use a belt-and-suspenders approach. Codetermination may well be a necessary precondition to a fairer economy, a balanced political system, and a healthier environment for collective bargaining.
For most Americans, the term “codetermination” is likely an unfamiliar one, and it may at first seem confusing and foreign. But the underlying idea that workers should have a voice in their workplace is very popular. Corporate consolidation in all sectors, the loss of local businesses, and the growing imposition of managerial algorithms have eroded workers’ connections to their firms and fostered a sense of loss and alienation. We need a role for workers—a meaningful role—in the running of the enterprises for which they sacrifice so much. It is a critical step on our path to a better future.
