Why not worker-directors?

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.  

Comments

[Matt Moore]

Chris, many of your proposals seem to require that businesses are not currently maximising shareholder value.

Why does the market for corporate control not function properly in this space? Specifically what features of the corporate institution?

After all, if you are correct, there's a lot of money left lying on the table.

[gastro george]

Because businesses are run by managers, so they are most likely to be run to maximise manager value?

[ADifferentChris]

@Matt

The profit motive is just one among a host. Humans and organizations are complex. The profit motive probably isn't even in the top league - maintaning class/gender/race relations, cognitive biases, inertia, etc.

[Matt Moore]

@gastro george

If putting workers on boards reduces that problem, why aren't shareholders insisting on it?

[gastro george]

@Matt - To complement what ADC says, it probably depends if you are talking about short-term and long-term shareholder value. Manager value and short-term shareholder value will often coincide, but that may not be in the long-term interest of the company.

Then ask yourself why worker representation is normal in Germany.

BTW, Chris, I've just been listening to some nonsense on Radio 4 that one of the reasons that May is turning away from worker representation is that it's become clear that this might be difficult in UK law - due to the legal requirement to maximise shareholder value. Isn't this just hogwash?

[AndrewD]

Gastro george:
If it is a legal requirement to maximise shareholder value, the short answer is change the law...that's what governments do. The long answer is define "shareholder value", is it short, medium or long term value?

[gastro george]

@AndrewD - that was my thought exactly.

[Tom]

@gastro george

Yes that's a pretty poor argument. There isn't a legal duty to "maximise" anything. Existing directors' duties require execs to promote the success of the company for the benefit of the members (NB- not "owners") but with regard to factors including the interests of the employees.

Section 172 here:
http://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2/crossheading/the-general-duties

[gastro george]

So it's hogwash and the Radio 4 "journalist" just bought it. How unpredictable.

[MJW]

@matt. I think it's chiefly down to classic agency issues. Firstly the major shareholders may be gambling with other people's money, secondly the management of listed companies only need to maintain the support of enough of those people gambling with other people's money.

[Kien]

@ Matt Moore, as a shareholder, I would be perfectly happy for workers to be represented at the board (but not control the board). I am not sure if this would necessarily enhance shareholder value, but I doubt it would lessen shareholder value. So I would not insist on it, but would certainly support worker representation.

More generally, there are many things that ought to be done but not necessarily with a view to enhancing shareholder value. If it contributes to worker wellbeing, that seems sufficient reason for worker representation.

[john]

Workers conduct their lives on the basis of their stream of income, and one tends to think, its PV. However firms own the duration of the stream, not the workers, as generally they do not have long term contracts. Having worker directors would transfer some of that ownership back to workers.

An entire board of workers would be interesting, as it seems such a board would only consider projects beneficial to workers and reject projects only beneficial to finance capital.

[bob]

IIRC, long ago Peter Drucker wrote that when Alfred P. Sloan retired from General Motors, he told Drucker that by far the best qualified person to take over would be Walter Reuther, the President of United Auto Workers - but neither the shareholders nor the board nor the union would have allowed it.
So they got a series of second-rate hacks instead.

[Keith]

Or is this just post truth in action? The tendency for actions to be divorced from words spoken before hand?

No politician will be expected to keep any undertakings any more?