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The Case for Codetermination: Advantages of Worker Representation

In recent years, American corporations have faced a crisis of legitimacy. A 2020 Gallup poll found that 58 percent of Americans were somewhat or very dissatisfied with the size and influence of large corporations, and only 19 percent of those surveyed reported having quite a lot or a great deal of confidence in big business. This development, no doubt driven in part by rising inequality and corporate greed, represents a serious problem for large corporations, who have attempted to bolster their reputations in a variety of ways. However, despite attempts by corporate leaders to present a more socially-conscious image, reforming corporate behavior will require a more foundational rethinking of how corporations are governed. The modern American corporation operates off a system of shareholder primacy, prioritizing the needs of shareholders over all other stakeholders. Codetermination – the practice of placing worker representatives on the board of directors – would replace this system with one that considers the needs of both workers and shareholders, providing workers with greater say in firm operations and incentivizing decision making that benefits the firm as a whole.

Codetermination has a long history, mostly in the social democracies of Western Europe. The most notable examples of countries that have implemented mandatory codetermination for companies over a certain size are Germany and Sweden. The main purpose of the laws remains the same across the two countries: to place worker representatives on the corporate board of directors, which appoints the managers and executives of the company and approves decisions, such as which areas of business to expand operations in and what to invest in. While on its face not a particularly radical change, codetermination marks a departure from the traditional form of corporate governance as expressed in America. American corporations, philosophically bound to the ‘Friedman Doctrine,’ have viewed their purpose as exclusively maximizing shareholder wealth. Uber CEO Dara Khosrowshahi expresses the predominant viewpoint among American business leaders, calling capitalism “a system that’s built to maximize shareholder value and capital.” Consequently, boards of directors have historically only contained representatives of shareholders. Since these boards shape corporate policy through the hiring of top managers and the approval of their decisions, this lopsided composition biases the company’s decisions heavily in the interests of the shareholders, sometimes at the expense of the workers. 

An example is the recent corporate response to the 2017 tax cut: massive stock buybacks. This action raised stock prices but did little to help workers or even increase long-term profitability. A Reuters investigation found that CEOs often engaged in buybacks to hit performance targets and thus raise their compensation, contributing to the widening gap between executive and employee pay. This kind of decision can only occur when the company’s leadership is entirely controlled by shareholders and therefore takes the concept of share price maximization to its logical extreme – artificially inflating share prices through buybacks. The problem is fundamentally one of incentives: when shareholders control the board of directors, the incentive structure prioritizes raising share prices at all costs, even when it is to the detriment of workers or other stakeholders. Worker representation helps alleviate this skewed incentive structure by balancing out shareholder interests on the board with worker interests. One report found that codetermination in Germany reduced corporate “short-termism,” which is characterized by excessive stock buybacks and executive pay. Similarly, another study found that firms with codetermination had higher levels of capital formation, suggesting that codetermination actually increased investment and long-term planning. Codetermination did not result in declining performance: A study found that codetermination performed better as a system during the financial crisis of 2008 than systems driven by shareholder primacy. This increase in worker representation has tangible effects for workers, with one study finding that codetermination substantially reduced overall income inequality. By balancing the interests of shareholders and workers, codetermination helps check myopic corporate action and ensures that decisions reflect the needs of all stakeholders.

In addition to its ability to check the interests of shareholders, codetermination allows workers to gain a stake in the operations of the firm by increasing workplace democracy. Over 39 percent of Americans work for a corporation employing more than 2,500 workers, a development that has coincided with the growth in economic and political power of large multinational corporations. This trend has run concurrently with an increase in alienation on the part of workers from firm operations. A May 2020 poll found that 69 percent of Americans thought that workers had too little power in the workplace, and 59 percent agreed with the statement that “workers need more say in how businesses are run.” Codetermination offers a chance to rectify this unfulfilled desire for worker input by giving workers a chance to directly elect representatives to serve their interests on the board of directors. This representation allows workers to voice their concerns and increases their confidence that the company considers their interests when making decisions. A study of codetermination in Germany found that this confidence increased productivity, while other researchers found that workers who transitioned to a firm with codetermination reported increased job satisfaction even if their wages stayed the same. Considering the central position work occupies in most workers’ lives, it is not surprising that workers desire more control over the workplace. Codetermination allows workers to fulfill this desire. 

The power of the American corporation has grown substantially in recent decades. Simultaneously, inequality has risen and corporations have come under fire for actions seen to be at odds with the social good. While corporations have made attempts at rehabilitating their public image, the biased composition of their boards of directors ensures that their first priority remains the interests of shareholders. The way to address the failures of the modern corporation lies not in expecting corporations to act against their own interests, but in changing what those interests are. Implementing a system of codetermination would reset the balance of incentives toward the interests of workers, finally providing them a say in the corporations that increasingly control their lives.

Photo: Image via Flickr (WOCinTech Chat)