Nearly a half-dozen countries require worker representation on corporate boards, and while the United States is not one of them, new research from an MIT economics professor highlights why it might be time to reconsider that status.
In their working paper “Labor in the Boardroom,” MIT’s Simon Jäger, and co-authors Benjamin Schoefer and Jörg Heining, find that companies that give employees a literal seat at the table have 40-50% larger capital stocks invested in fixed assets — such as machines or factories — as well as lower outsourcing and an increase in labor productivity to the tune of 16-21% more in value added per employee.
“We … conclude that, overall, shared governance appears to raise capital intensity without negative effects on employment, pointing towards scale increases and a shift to higher capital intensity in production,” the authors write.
The researchers looked at German stock corporations and limited liability corporations incorporated between August 1992 and August 1996. Prior to 1994, Germany required one-third of corporate board seats be allocated to workers (also called shared governance).
In August 1994, Germany stopped the requirement for newly incorporated stock corporations but kept the rule for older companies. The reform allowed the researchers to have a clearly defined timeframe to compare companies’ performances by whether they were incorporated before or after the shared governance requirement — and add to the “scant” evidence of the pros, cons, and hypotheses around worker representation on corporate boards.
The study comes at a time when the United States’ economy and labor practices are being considered by voters ahead of the 2020 presidential election. And some politicians, including at least one leading Democratic presidential contender, have proposed laws requiring worker representation on boards.
“The view is that American corporations have gone too far in responding to shareholders’ interest, but not attending to the workforce interest,” said Thomas A. Kochan, a professor of work and organization studies at MIT Sloan. “So this is an effort to rethink the form of capitalism that will be best for society and business and the workforce in the future.”
A brief history of labor laws
The German shared governance system evolved out of the country’s history of using work councils, and was put in place as part of reconstruction efforts after World War II. Part of the concern was that unions had been quickly attacked and destroyed by the Nazis, and large corporations had cooperated too easily with the regime.
“So putting workers on the board of directors was a way to help rebuild the economy and democracy in Germany,” Kochan said.
American labor laws date back to the mid-1930s, with a focus on collective bargaining as the form of worker representation.
“That law basically gives workers the right to join a union, to negotiate over collective bargaining agreements over wages, hours, and working conditions, but it leaves all managerial decisions — where to locate a business or a plant, what technologies to use, how to organize its basic production systems and so on — to management,” Kochan said.
Kochan said there was a time in the 1980s and 1990s when Lynn Williams, president of the United Steel Workers union, negotiated board representation, but there is little else by way of shared governance examples in American history.
Some benefits of shared governance
The researchers found that while shared governance — also known as codetermination — did impact capital formation among German companies, it did not raise wages, did not increase rent (profit) sharing, and there was no clear evidence that employee board representation impacted executive pay nor that it lowered shareholder profits.
“We found only limited increases in wages, which may help to explain why investment was not deterred by having worker-elected directors,” the authors write.
Jäger and his colleagues found that shared governance led to an increased value added per worker of about 40,000 Euro, and raised the capital-labor ratio by about 72,000 Euro per worker.
The researchers also noted that shared governance lowered the share of low-skilled workers by about 10-15%.
Other things to consider
While the study offers an alternative to the theory that shared governance leads to disinvestment, it does consider potential concerns around the practice.
Having workers on a board can help with the flow of communication between managers and employees, but the “increased diversity of objectives could decrease managerial accountability.”
Workers elected to the board might be there to represent their fellow employees, but they could also “have longer horizons and more at stake” compared to other outside shareholders.
“More broadly, increasing worker bargaining power has also been hypothesized to lead to an entrenchment of incumbent workers perhaps at the expense of outsiders,” the authors write.
But the researchers also point out that workers who are overly demanding or lean too far into self-interest for themselves or fellow employees could be outvoted by other board members.
“Thus, in order to exert influence, labor representatives may have to be moderates in order to successfully build coalitions with the shareholder representatives,” the co-authors write.
Legislation leading to change
Jäger’s research suggests that actively incorporating workers in decision-making at a firm may contribute to more cooperative relations between management and the workforce. And there is an increasing recognition of that view, notably in the presidential race and on Capitol Hill.
In October, Sen. Elizabeth Warren renewed her call for shared governance in American companies. The Massachusetts Democrat last year proposed the Accountable Capitalism Act, which would require at least 40% of boards at corporations with more than $1 billion in annual revenue to be comprised of representatives selected by employees.
Senator Tammy Baldwin, D-Wisc., proposed a similar bill that would empower workers to elect one-third of their public company’s boards. The bill was sponsored by Warren as well as Vermont Independent Sen. Bernie Sanders.
Those high-level decisions impact employees’ lives, Kochan said.
With board representation, workers, he said, can lend their voices to say “Let’s make sure the workforce is prepared for the changes in technology and let’s use those technologies sensibly to not just be viewed as something to replace workers. But how do we make our whole operation more efficient, more productive, and provide good job opportunities and deal effectively with those people who may be displaced?”