Want to fix US corporations? Put regular workers on company boards

Its time to give workers a seat at the table, argues Susan Holmberg.
Its time to give workers a seat at the table, argues Susan Holmberg.
Image: REUTERS/Clodagh Kilcoyne
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The mindset that corporations exist first and foremost to pay shareholders has dominated economic thinking for decades. But this ideology—also known as shareholder value—was never without controversy. GE’s Jack Welch famously criticized it as “the dumbest idea in the world,” and these days, it is increasingly drawing ire for driving down median wages, compressing job growth, and exacerbating our inequality crisis.

Thankfully, these critiques are gaining traction amongst progressive voices in Congress, who are pushing a range of policy options to fight shareholder value ideology and its fraternal twin, short-termism (prioritizing next-quarter share prices over long-term investment).

Last year, Senator Tammy Baldwin introduced The Brokaw Act to ratchet up oversight of predatory hedge funds. Senators Richard Blumenthal and Jack Reed are perennially trying to close the performance pay loophole that makes equity pay tax deductible and costs us millions of dollars in lost tax revenue. And some analysts are also calling for regulating stock buybacks, an escalating corporate habit that props up stock prices by using excess cash—and in some cases debt—to repurchase shares rather than paying workers more and investing in research and innovation.

Another bold policy idea for curbing this ideology can be found in German-style co-determination. Co-determination, which has long been an integral part of the German corporate governance system, is perhaps best known as an arrangement in which workers serve on corporate boards. But it’s more than that. Co-determination also entails works councils, which are “shop floor” worker-management organizations that address day-to-day workplace issues and implement labor law at the local level. More broadly, it amounts to the legal right of workers to co-manage corporations, empowering them with legitimate power and leverage as corporate stakeholders.

Scholars have long argued that globalization—particularly capital market liberalization—would force Germany to abandon co-determination and move to American-style corporate practices more generally. And at times it certainly appeared to be trending this way. As German exports, corporate sales, and GDP growth declined in the mid-1990s, Germany modernized its financial system and implemented KonTraG, the suite of neoliberal corporate governance reforms that made, for example, executive stock options easier and cheaper to implement.

But while some employers pushed to weaken the role of workers on boards, they never garnered enough political support. Trade unions successfully pressured both the Shroeder and Merkel governments to enact reforms that shored up co-determination. In fact, in 2006, Chancellor Merkel displayed her unequivocal support by stating “codetermination is part of our social market economy, which is impossible to imagine doing without, and which has proved itself in Germany.”

As my latest report argues, not only has co-determination persisted, it has shielded the German system from features of short-termism that have caused so much havoc in the US. Executive stock options, which incentivize irresponsible risk taking, fraud, and yes, the practice of buybacks, are viewed by the German public and its workers as highly suspect, and they are issued at a much lower rate than in the United States. And while German executive pay has risen, it is nowhere near the levels of America’s juiced up executive pay, which has become a major driver of our inequality crisis. In 2015, the typical German CEO made $5.6 million while their U.S. counterparts took home $14.9 million. Beyond the numbers, the German sense of executive strategy and purpose remains intact. A recent ethnographic study of German executives demonstrates that the German notion of corporate purpose has endured. During interviews, these executives emphasized the importance of serving society and balancing the interests of shareholders and employees through the production of quality goods and services.

What do these facts have to do with co-determination? Most of these practices are decided at the board level. Co-determination gives workers board-level power to push back against any typically international shareholders who are trying to force their next-quarter agendas across the table. More subtly, co-determination is part and parcel of a widespread corporate and public culture that believes in the quality of German products and the long-term vision of their companies.

The sentiment that co-determination goes hand-in-hand with Germany’s corporate governance system is even true for most managers, many of whom passionately resisted protective reforms but have ultimately come to accept, and sometimes even embrace, workers’ role in corporate management.

A U.S. federal law that requires, for example, a certain percentage of boards to be worker representatives seems pretty unlikely. Yet, we are now having a lively debate about single payer healthcare, which was unthinkable ten years ago. An advantage of today’s political landscape is we can propose bold ideas that change how we think about policy issues over the long term. We might never get German-style co-determination, but a healthy debate about it would drive home the point that the better we treat workers, the better off American businesses and the economy will be.

Susan Holmberg is a Fellow at the Roosevelt Institute, where she researches and writes on inequality and corporate governance issues.

Correction: A previous version of this article incorrectly stated that Senator Tammy Baldwin introduced The Brokaw Act in August. She introduced the act last year.