Worker Voice and the New Corporate Boardroom: Aspen Institute Business & Society

Worker Voice and the New Corporate Boardroom

Worker Voice and the New Corporate Boardroom is a new paper from the Aspen Institute Business & Society, based on a series of roundtables Idea Lab on Worker Voice in Corporate Governance.

Whether the focus is on wages, worker health & safety or diversity, equity & inclusion, the year 2020 opened up new conversations about how our modern economy treats workers. Currently, workers have no formal role in American corporate governance. Worker insights rarely inform board-level decisions and the result is wasted potential that if captured, could benefit companies, workers, and society as a whole.

Below are just a few highlights for me, mostly in the words of the authors. The paper deserves broad circulation and attention. It deals with the most important issue of our time. We will not have a truly democratic society as long as our working lives are spent in organizations that do not reflect that fundamental value. Democratic corporate governance is needed to bring all knowledge to bear if we are to address the unprecedented crises of our age.

The scientific evidence is overwhelming and has been for decades. It is paradoxical; the standard justification for autocratic corporate structures is alleged efficiency. Yet, the empirical research points in the opposite direction. Increased democracy and individual autonomy within organizations are associated with greater personal involvement and productivity. Employees working in more democratic organizations also bring a greater sense of political efficacy to their other roles, enhancing their ability to live authentically and contributing to society.

Knowledge, logic, and beliefs do not lie in our institutions themselves but in the minds of those who actively participate in superimposing order and direction on those institutions. If we are to avoid control of our institutions and the direction of knowledge by self-appointed elites, we must seek to increase the legitimacy of corporations by making them more democratic. For that legitimacy to be real, not just temporarily perceived as real, there must be an actual shift in power from elite groups to the larger body of stakeholders, most importantly workers.

Worker Voice and the New Corporate Boardroom: Expanding Diversity in the Boardroom by Adding Worker Voice

David Berger: 2020 marked the first time every company in the S&P 500 has at least one woman director, and 59% of new directors in the 2020 proxy year were diverse. These numbers have changed dramatically over the last decade; as recently as 2010 more than 75% of directors were white men, Fortune 500 companies had no women directors and scholars and practitioners alike stated that the number of minority candidates on boards was “stagnant” and had “stalled.”

A multi-year study by McKinsey shows that there is a significant correlation between board diversity and higher profits.

Companies with worker representatives on the board have a 16-21% increase in labor productivity, lower outsourcing, and 40-50% larger capital stock invested in fixed assets, such as machines or factories. That all leads to greater productivity per employee.

Companies with worker representation on boards (i) invest twice the amount that similar firms without worker representation do, (ii) create 9% more wealth for shareholders than comparable companies without worker representation, (iii) while communities that have corporations with workers on their boards distribute income more equally and provide their citizens greater economic opportunity, and (iv) pay wages 18-25% higher than companies without worker representatives on the board.

Nothing in Delaware law prohibits a company from including a charter provision that provides a certain number of directors shall be elected by workers and/or requiring that a certain number of directors are employees of the company. Indeed, a corporation could create a separate class of stock solely for employees and give this class of stock the exclusive right to elect a certain percentage of the company’s board of directors (and further provide that a departing employee must sell this stock back to the company upon the end of their employment).

Designed for the primary purpose of allowing founders and other insiders to have extra voting shares, it could easily be adjusted to give employees the right to choose a certain number of directors. Boards should ask whether some of these stakeholders should also have the right to select directors. Allowing such a process, which is both common and quite successful in many of the OECD countries, could create even greater diversity of thought on the board, and provide boards with greater insight and ability to focus on all corporate stakeholders. Bravo! Let’s do it!

Worker Voice and the New Corporate Boardroom: The Value of Worker Voice

Michelle Greene: The Long-Term Stock Exchange conducted extensive interviews with executives, workers, academic experts, policymakers, and board members. Among interviewees, there was almost universal agreement that the presence of worker board members is more helpful than hearing worker perspectives in other ways (although all questioned how it would work in the U.S. context).

Employee participation on the European boards is highly impactful and valuable particularly on issues of compensation. One director noted that behavior in the U.S. would be different with worker board members because it would be “embarrassing to try to offer these increases to only executives with this kind of income inequality if [workers] were in the room.”

Currently, U.S. boards depend heavily on the CEO and CHRO to communicate worker concerns to the board. Employee survey results were cited as the most common way that boards “hear” worker perspectives.

Some additional ideas for increasing and institutionalizing worker voice on boards (from these interviews and other prior research and discussions) included:

  • Appointing worker board members to the boards of U.S. companies (with one significant additional challenge to those discussed above being identifying appropriate ways to select effective representatives).
  • Creating a trust that holds equity for workers and has the right to appoint a trustee to the board with a fiduciary duty to represent their interests.
  • Appointing one or more directors to be responsible for meeting regularly with workers and reporting back to the board on the worker perspective (some boards have such an approach for ESG).

Worker Voice and the New Corporate Boardroom: Reimagining Board Committees to Accommodate Worker Voice

Doug Chia: In 2020, the SEC amended its rules on annual corporate disclosures to require registrants to describe their “human capital resources… and any human capital measures or objectives that the registrant focuses on in managing the business.”

CII issued a report focusing on “public disclosures of how large U.S. public companies provide opportunities for board members to interact directly with employees, both at the management level and deeper within the organization.” CII observed that “many boards of directors are elevating company culture in their oversight of corporate strategy and risk… dedicating more time to presentations from human resources personnel, visiting worksites and assessing top management’s success in setting an appropriate ‘tone at the top.’” The CII report went on to say, “[s]upport is growing for explicit policies that encourage director interaction with rank-and-file employees as a way for boards to better oversee corporate culture.”

What is clear is that boards would have to be proactive in using the access granted to them and go to great lengths to create regular opportunities to hear rank-and-file workers’ voices directly from the workers themselves and engage in candid dialogue away from the watchful eyes (and sensitive ears) of senior management.

Chief Justice Strine and his co-author, Kirby M. Smith, wrote that expanding the compensation committee’s perspective beyond executive compensation would make the committee think about the “company’s workforce as a whole” and “result in directors who have a better grasp on how human talent matters for the company’s business strategy and operations.”

Chief Justice Strine separately proposed that boards be required to create “workforce committees” to “address workforce issues,” including “ensur[ing] quality wages and fair worker treatment,” at the board level.

Board committees are of particular interest because a board typically creates committees, either standing or ad hoc, for a subset of the board to dive deep into particular board responsibilities and report back to the full board with recommendations for board action. If worker voices are to be made a board priority, that initiative should start with a dedicated board committee.

Worker Voice and the New Corporate Boardroom: Labor Investors

Isabelle Ferreras: Labor investors put their mental and physical health at risk when they go to work – they invest their entire selves. By comparison, the risk taken by capital investors is limited; hence the term “limited liability.” The risk taken by capital investors is restricted to a  sum of money they put into the endeavor – an asset external to their own person as a physical and psychological being, in other words. The risk borne by labor investors is not. An investment of labor is, both literally and figuratively, highly personal.

In the past few years, from within several major firms, employees have attempted to voice their own views about their firm’s strategy to their own top management. In May 2018, thousands of Google employees wrote to their CEO, Sundar Pichai, and asked him to drop the “Maven Project,” which provided artificial intelligence to a Pentagon drone program. Dozens of employees resigned in protest. In June 2018, Microsoft employees protested a contract with the United States Immigration and Customs Enforcement Agency because of its inhumane policy of separating children from their parents. In August, U.S. employees of Twitter objected to opaque processes surrounding decisions to shut down accounts for inappropriate content.

Firms are political entities with key economic dimensions, whose very existence is made possible by the joint investment of labor and capital. But despite the fact they would not operate without the former, firms currently only recognize the rights of the latter, those who contribute financial capital, via the structuring of capital investment in the corporate structure which is given a monopoly of the – political – rights to govern the firm. Labor investors should be recognized as the forgotten constituency of the firm, and as such, should be afforded the same rights in its government. Corporate law should require that labor investors, as capital investors, benefit from at least the same rights as those enjoyed by capital investors, and have thus a defining role in strategic corporate decisions.

Worker Voice and the New Corporate Boardroom: How and Why

Lenore Palladino: 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 outsource production. Even when employees are unionized, collective bargaining is limited to the terms and conditions of employment.

As workers are the main stakeholder group directly engaged in the production and delivery of goods and services, they should share governing power within American corporations through meaningful representation on corporate boards of directors. This will enable workers to have a voice in major corporate decisions and benefit the corporation by bringing the employee perspective on risks and opportunities into the boardroom.

For worker-directors to communicate with workers effectively, there must be some sort of organizational structure in place for employees. Works councils should serve to provide a forum for worker directors to hear directly from the workforce, so they need to have some permanent form, procedures, and boundaries.

Worker Voice and the New Corporate Boardroom: Dual Majority Board

Julie Battilana & Isabelle Ferreras: The laws governing corporations have elevated the interests of capital investors at the expense of labor investors and society.

Concentrating such power in the hands of shareholders has unsurprisingly led many firms to excessively focus on profit and the short-term financial gains without systematically accounting for their impact on the well-being of their employees, the environment, and the broader society.

Recent research revealed that companies that signed the Business Roundtable statement were almost 20% more likely to fire their employees when the COVID- related economic contraction began in March and April 2020 than those that did not sign the statement, all the while further enriching their shareholders.

The overwhelming focus on financial gains has endangered political democracy and constitutional government, as some firms have used their increasing power to influence government in any way that increases their profitability with no countervailing incentive to consider the consequences of their political activity for society as a whole.

All workers should not only be able to vote for union representation to bargain over wages and working conditions that concern the
entire industry. They should also be able to choose their representatives at the firm level so that they can participate in decision-making about the life of the firm. The choice of the CEO, what product and market strategies it should pursue, what to prioritize in times of crisis, and how profits are shared — all would benefit from worker input.

Democratization of political entities has been spurred historically by bicameral moments, when the dominant group, which monopolized political rights based on ownership of property, was forced to share power with a second constituency, whose legitimacy to co-govern the joint entity could no longer be denied.

The principle of requiring dual majorities is that majorities of both board members elected by the shareholders and those elected by workers are needed to ratify board decisions.

As shareholders enjoy a voting right to select the members of the Board, all labor investors should be able to do the same.

Power-sharing between capital and labor investors is necessary to ensure shared prosperity for all and not only for a wealthy minority. Given the increased social unrest that results from economic and social inequality, it is in everyone’s interest, including the rich and powerful, to bring about such a change.

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