Putting workers on the board builds healthier businesses
When legendary physicist Richard Feynman was called in to help solve the mystery of the Challenger space shuttle explosion in 1986, he didn’t use advanced maths. Instead, according to his account, he went and talked to the engineers. The workers who actually built the space shuttle, he found, had a good idea of which parts were likely to fail. Talking to them helped point Feynman towards a flaw in the rubber O-ring joints, which everyone eventually realised was the cause. This story illustrates a more general principle. Workers have a lot of knowledge about the day-to-day operations of the businesses they sustain. Salespeople know what customers want, and how buyers decide to make purchases. Assembly-line workers know how to speed up manufacturing and prevent defects. Engineers know how to redesign products, and so on. These are things that executives and top managers may overlook. And if a business or product line is struggling, executives may sell it off or downsize instead of addressing the problems at the operations level.
Germany has come up with an innovative solution to this problem — put workers in corporate boardrooms. Since 1976, German companies with more than 2,000 employees have had to reserve half of their board seats for workerelected representatives. Those with 500 to 1,000 employees must set aside a third of board seats. Referred to as co-determination, this policy
— which has been proposed in the US by senator Elizabeth Warren — is often touted as a way to give workers more power to demand better wages and benefits. But its primary benefit might be improving corporate productivity.
There’s evidence that the 1976 reform boosted total factory productivity at companies subject to the new law. Worker board representation probably also improved shareholder value — an ironic outcome for a policy that reduces shareholder control. Economists generally cite worker input as the reason for these improvements.
Now, a new paper by economists Simon Jäger, Benjamin Schoefer and Jörg Heining sheds more light on the issue. Studying a 1994 German reform that abolished mandatory worker representation for some new smaller companies but locked it in permanently for older ones, the authors found that the companies that had to keep workers on the board ended up investing more in fixed capital (buildings and machines) and becoming more capital-intensive. This added capital, they concluded, raised value added per worker.
Interestingly, Jäger et al did not find that co-determination had much effect on wages. The main effect of worker representation was not to redistribute the corporate pie, but simply to expand it.
This research gives insights into what co-determination would and wouldn’t accomplish if implemented in the US. It suggests that worker representation on corporate boards might do little to reverse the decline in labour’s share of income, the divergence between wages and productivity, or the gap between executive pay and average worker salaries. For that, other reforms and institutions — expanded unions, workers’ councils and/or wage boards — may be necessary.
Instead, co-determination should be seen as a tool for reversing the long-term decline in business investment. In other words, worker representation may be the antidote to downsizing.
Worker representatives in corporate boardrooms may serve as an important counterweight to executives whose instinct is to sell or close a business or slash workers when the company hits a rough patch.
So while co-determination can’t solve all of corporate America’s problems, it has great potential as a way to increase productivity, boost investment, improve job security and make jobs more dignified and meaningful. It should be considered in any broad package of economic reforms.
Worker representation may be the antidote to downsizing