I’m disappointed but not surprised that Theresa May has backtracked on the promise to put workers onto company boards. But let’s be clear why I’m disappointed.
A single worker-director would not greatly empower workers – although of course it might be a stepping stone towards a greater voice. Sam might be right to say that giving workers shares might be a better alternative.
Instead, I favour worker-directors not so much because I'm a socialist but because I'm a libertarian. I support them for the same reason that I support free markets (in some contexts) and free speech. It’s because I believe in cognitive diversity. Worker-directors would increase boardroom diversity – not least by bringing ground truth to the table – and thus improve decision-making. The more intelligent fund managers see this. This is what Aberdeen Asset Management told the BIS select committee:
There is a significant body of evidence showing that mixed teams make better decisions. The best boards feature a mix of gender, ethnicities and socio-economic backgrounds. Any board that believes it cannot be enhanced by the inclusion of views from significant parts of society is clearly suffering from closed minds in more ways than one.
This is especially the case because worker-directors have skin in the game. Workers are more exposed to the risk of the company doing badly than are outside shareholders, and so have a big incentive to ensure it is well-managed. As Tom says:
Employees have far more firm-specific risk than investors, and are acutely aware of the need to act in a way that does not damage their known "investment" in the business. In contrast, especially where the "shareholder" is an intermediary, investors have far less at stake in any given company, and can often act in a very short-term fashion to their own benefit.
I’ll concede that these arguments run into a problem. Evidence from Germany – where worker-directors are more common – suggests that their effect upon corporate performance is mixed: see, for example, this survey (pdf) by John Addison and Claus Schnabel.
This, though, might disguise the fact that there is a (large) subset of firms where worker-directors do make a positive contribution. These are in firms where workers are skilled and informed. Larry Fauver and Michael Fuerst say (pdf):
Labor representation increases firm value by acting as a conduit for the flow of information…On an operational level, it is arguable that labor has a unique perspective on the costs of production, especially those related to worker hours. A labor presence on the board consequently provides unique insight into project feasibility and therefore improves corporate decision-making.
They show that in higher-tech industries, worker directors do indeed increase shareholder value.
All this brings me to a paradox. Theresa May believes we should listen to the “will of the British people” even when this conflicts with expert opinion. And there are times when this is correct. Sometimes, the people do indeed know more than experts: this is the case if knowledge is dispersed and fragmentary or if the people know ground truth better than experts.
And as I’ve said, these conditions are more likely to be satisfied in workplaces than was the case in the Brexit vote. Which poses the question: how can Ms May favour giving people a voice in some circumstances but not in others, when that voice is likely to be an informed one?
The answer, I fear, is simple. Ms May wants to hear the people’s voice not out of a belief in the wisdom of crowds, but because she’s simply a populist. She want to hear the worst of people’s voices, not the best.