Should Workers Be Represented on Corporate Boards?

A corporation is a special kind of legal entity, and the precise nature of those entities is determined by political decisions. Such things vary from place to place, often in major ways. Both Germany and the United States, for example, feature large multinational for-profit business entities whose shares are bought and sold on public stock exchanges. In the United States, such corporations are formally governed by boards of directors who are loosely accountable to the company’s shareholders. In Germany, by contrast, boards are a mix of shareholder representatives and worker representatives.

The idea of switching to a “co-determination” system is something that almost never seems to get discussed in the United States. On the one hand, it’s far too radical to be politically realistic. But on another level, I think it seems not radical enough to become anyone’s obsession—Germany hasn’t abolished capitalism or anything. In fact, German firms still seem pretty voraciously profit-seeking.

But Kent Greenfield has a really great article in Democracy (somewhat oddly framed around Citizens United) making the case that America would benefit from a co-determination system. He discusses this primarily through the lens of the laws of incorporation, which leads him to worry a lot about the fact that this is a state-level issue in which Delaware has won the race to the bottom. But you could actually cut through all those state-level problems by turning this into an issue of securities law, just make it that public companies need worker representation on boards. That would deter companies from going public, but I don’t think it would be a big deal. It’s extremely rare already for firms to go public as a means of raising investment capital. IPOs happen because early employees have been compensated with shares that they want to be able to sell into a reasonably liquid market. The bigger practical issue is that a firm that’s partially worker-governed would be much less inclined to disgorge the cash—i.e., kick profits back into the hands of shareholders.

But that’s arguably also the virtue of the plan. The past five years have seen a lot of bemoaning of the “financialization” of the American economy, but relatively little in the way of practical diagnosis of its sources. In a co-determination system, the role of financial markets in allocating capital would be curtailed in favor of allocation by the managers of successful non-financial firms. That strikes me as being as good a short definition of what reversing “financialization” would mean as anything else.

At any rate, given that Germany is not exactly an obscure country there’s surprisingly little persuasive empirical economics research on the subject. Gary Gorton and Frank Schmid did a mathematically sophisticated examination in 2000, which demonstrated that co-determination succeeds at empowering workers at the expense of capital (“firm resources are directly differently, decreasing the return on assets and the market-to-book ratio”) but doesn’t really say much about whether this is a good idea or not. I think it deserves much more consideration. I frequently hear people who want to achieve this goal but don’t always have workable means for doing it. Co-determination seems to fit the bill, and has, in fact, been implemented in a large modern market democracy so we can be reasonably confident that it would work.