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Economic Democracy at Work


Lenore Palladino (@lenorepalladino) is an assistant professor of economics and public policy at the University of Massachusetts, Amherst.

Why (and How) Workers Should Be Represented on US Corporate Boards

For the past four decades, U.S. corporate governance has followed a “shareholder primacy” model in which the maximization of shareholder value is defended as the sole goal. Under U.S. corporate and labor law, workers have no voice in major corporate decisions, including who to hire and how to compensate a CEO, whether to merge or acquire another firm, what kind of shareholder payments to authorize, and how to structure production.

My article recent JLPE article takes up the century-long debate of how to structure worker voice and corporate governance in the United States, arguing that worker representation on corporate boards—and the worker organization necessary to accomplish real representation—is one key policy reform for economic innovation and prosperity. In this post, I summarize the two main elements of the article: (1) why shareholder primacy is flawed and how we should refocus on what makes corporations productively innovate; and (2) the key policy questions that arise when considering policies mandating that workers elect directors to corporate boards in the United States in the 21st century.

The “Social Control of Business:” Ending Shareholder Primacy by Understanding What Enables Innovation

I have written elsewhere on the many harms of shareholder primacy. First, because shares are primarily owned by the wealthy, stock market gains flow disproportionately to households in the top 10%, even when, as during the pandemic, millions were out of work. Second, shareholder primacy is completely empty of any economic theory of how production and innovation occur within a company. Third, the whole theory is based on the false idea that shareholders actually contribute funds to companies. While this was largely true one hundred years ago, today the shares of publicly-traded companies are largely traded in the secondary markets, which means that buying a share sends the funds to the share seller, not the company itself.

What is the alternative? The “Theory of the Innovative Enterprise” shows, in contrast to the market-based vision of the corporation, that the innovation process necessarily involves collective and cumulative learning by the workforce, along with long-term financial capabilities that enable management to take risks that can lead to innovation. TIE articulates three “social conditions of innovative enterprise—strategic control, organizational integration, and financial commitment—that support the innovation process.” Collective learning cannot be successful without worker participation, as it is a risky and uncertain process that involves the tacit knowledge that the workforce collectively constructs along with management. This framework recognizes that workers—unlike shareholders—actually have a substantive stake in the production process that they can bring to corporate governance.

Policy Design for Worker Representation on US Corporate Boards

In order to understand the policy options available when reforming corporate law, it is necessary to first delineate the relationship between U.S. labor and corporate law. Under the NLRA, issues that are not related to terms and conditions of employment—including anything termed a business decision, or within the core of entrepreneurial control—is outside the scope of labor law. Under Section 8(d) of the NLRA, employers must bargain with the union in good faith only “with respect to wages, hours and other terms and conditions of employment.” NLRA § 8(a)(2) protects workers against “company unions” and prohibits employers from dominating, interfering with, or financially supporting labor organizations. Though this Section is meant to protect employees’ right to elect their own representatives, it can also prohibit employee engagement in the production process.

Asserting that workers should be represented on corporate boards raises many policy design questions; I outline only some of them below (for more details, please see the article).

First, workers should have representation that is proportionately sufficient to affect decisions. Corporate bylaws can ensure meaningful collective voice by requiring over two-thirds of board directors to vote in favor of significant corporate decisions, such as dissolution or merger. In this case, a one-third proportion on the board would be sufficient for worker-directors. In Germany, workers represent one-third to one-half of the directors for companies that fall under the codetermination mandate. The presence of worker-directors is likely to induce management consider to workers’ perspectives and concerns preemptively and may change what issues they bring up in the first place.

Second, for worker-directors to represent workers effectively, there must be some sort of organizational structure in place. Works councils in Europe operate in an institutional structure that makes clear what the councils’ role is: they do not bargain over the terms and conditions of employment, which happens at the sectoral, regional, or national level, and they do not bargain over the social wage (health care, retirement, leave policies). Their role is therefore to provide a forum for collective discussion over the production and innovation process between workers and management.

The United States has a completely different context: no social wage, no external-to-the-firm bargaining over terms and conditions of employment, and low rates of private sector unionization (6.2%). Unions that are chosen to be the exclusive representative of the workforce have the responsibility to bargain with management over the terms and conditions of employment, and do not bargain over decisions that fall within the “zone of entrepreneurial control.” In this context, there are several options for structuring additional workers’ organizations that would enable worker-directors to faithfully represent the interests of the workforce in the United States. First, workers’ councils could be prohibited from any discussion (and certainly bargaining) over the terms and conditions of employment (though this would leave non-unionized workers with no way to collectively bargain). Second, to ensure that councils provide a forum for worker directors to hear directly from the workforce, they need to have some permanent form, procedures, and boundaries.

The third critical question concerns worker-directors’ engagement with management. In the European case, the main function of the works council is to engage with management over enterprise-specific issues. Under U.S. labor law, councils could run afoul of NLRA § 8(a)(2), passed as part of the 1935 Wagner Act to end the practice of company unionism. Rogers and Streeck (1995) suggest that this prohibition was drawn too broadly, and that two issues must be disentangled. Councils where employees freely choose to engage with management over production and entrepreneurial decisions should be differentiated from councils that function in the spirit of a ‘company union,’ where management controls who sits on the council and uses it as a way to preempt employee free choice. In other words, the Wagner Act sought to disallow the paternalistic type of works council but did not distinguish the consultative and representative roles of workers’ organizations sufficiently.

One solution is that councils be established only when a majority of employees freely chooses to establish them through a secret ballot, since it is clear that councils that are unilaterally established violate § 8(a)(2). However, this directly contradicts the idea that worker-directors need a permanent forum within which to engage with the workforce to ensure faithful representation. Another way to balance their institutional role could be to structure councils so that, beyond electing worker-directors, councils have only an “information and consultation” function vis-a-vis management. The NLRB’s ruling in Electromation found that worker organizations formed to solely focus on increasing company productivity, efficiency, and quality control would be allowed. This would potentially require amending § 8(a)(2) to distinguish between the role of councils while preserving employees’ right to determine exclusive representation in collective bargaining. In practice it can also be tricky to distinguish between the “terms and conditions of employment” and “consultation over business decisions” that directly involve the workforce. For example, on which side of the line does outsourcing fall? All of these considerations mean that the trickiest question for policy design is likely how best to structure workers’ organizations to enable worker representation on corporate boards.

A final option is to construe workers’ organizations in the United States as being solely a channel between the non-management workforce and their duly elected board representatives, with no management consultation or engagement. Though this would mean that while such organizations do not improve productivity and the flow of information and consultation between workers and management, they would likely not run afoul of § 8(a)(2) because there would be no engagement with management. This largely one-way channel may be necessary for the workforce to elect representatives, but they would not fulfill many of the functions that make the combination of codetermination and work councils effective in Germany and throughout much of Europe.

My article proposes that workers should elect a substantial proportion of the corporate board of directors, sufficient that they have the ability to collectively veto major corporate decisions. My main goal is to identify how this policy would fit into the institutional context in the United States. 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 to rebalancing power within the corporation and ensuring long-term economic and social prosperity.