Arnold Kling  

Changing the Corporate Form of Organization

Hardline Libertarians?... My Last Post...

Concerning U.S. corporate law, Kent Greenfield writes,

Compare this to the European model of corporate governance, which requires much more robust social obligation on the part of corporations, embodied not only in cultural norms but also in law. The duty to disclose information and consult with employees is much more robust, and many large European companies include labor representatives on their boards. Germany, for instance, requires that half the senior board of large companies be elected by employees rather than shareholders. And at least another 15 European countries have some kind of provision requiring "co-determination," worker representation on boards of companies headquartered in their national territory.

The entire article is a must-read if you want insights into the progressive mindset. Perhaps our colleagues at libertylawsite will comment.

My reading is that Greenfield is asking why corporations should be controlled by shareholders. Aren't other stakeholders, including workers, at least as important?

My off-the-cuff answer is that shareholders have to be in control because they are subject to looting in a way that workers are not. A worker who gets the shaft can simply go elsewhere*. Shareholders are in it for the duration, regardless**.

*As a worker, I might invest in a lot of firm-specific human capital, which could make it difficult for me to exit the firm. So in theory I do face some risks of adverse, arbitrary decisions from management. However, I do not need to have a voice in order to protect myself. As long as the firm and I are sharing the rents from this firm-specific human capital (vs. me taking all of them), the firm has an incentive to treat me well.

**As a shareholder, I can sell stock at any time. However, suppose that today the workers vote to loot the company, selling off its assets to pay a huge worker benefit. At that point, I can sell my stock, but it is already going to be worthless, because who will buy it? So, even though I can sell at any time, the value of my shares depends on the long-term value of the company.

If you want to see how the "workers as stakeholders" model turns out, I suggest you look at the public sector in California or the school system in Maryland.

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COMMENTS (14 to date)
Joshua Miller writes:

Also look at Valve, Semco SA, and most small law firm partnerships. Outside the public sector this kind of stakeholder management looks a lot less dangerous.

[broken url removed. Please check your links before posting your comments. --Econlib Ed.]

David N. Welton writes:

"If you want to see how the "workers as stakeholders" model turns out, I suggest you look at the public sector in California or the school system in Maryland."

Or, how about, Germany?

That country seems a bit more relevant if you want to look at actual companies, rather than looking at the public sector, which is bound to be quite a bit different than the private sector wherever you look at it.

I mostly agree that the state should not require workers to be stakeholders, but I think your closing line was a bit weak.

david writes:
A long as the firm and I are sharing the rents from this firm-specific human capital (vs. me taking all of them), the firm has an incentive to treat me well.

No, it doesn't. Your threat to leave is not credible. Ultimately it still depends on how easily you can be replaced vs. how easily you can replace your employer.

Jeff writes:
Instead of thinking of corporations as pieces of property owned by shareholders, we should conceptualize them as team-like enterprises making use of a multitude of inputs from various kinds of investors. The success of corporations depends on the contributions of many different stakeholders, and the governance of corporations should recognize those contributions.

Workers of the world unite, eh?

KLO writes:

My experience with the German works councils tells me that they are less adversarial and better led than private sector unions in the United States. Part of this may be due to the fact that blue collar work in Germany is not as low status as it is in the U.S. and so there are many intelligent and thoughtful people on the works councils and within the blue collar ranks. A stakeholder model may work better than management or shareholder centric model when the stakeholders all committed to a firm's success. In the U.S., this really is not the case. Employees, management and shareholders really only look after their own interests and the firm is the rope used among them to play tug of war. Unless we change the culture, the stakeholder model will not work here across a broad range of firms.

Hugh writes:
The duty to disclose information and consult with employees is much more robust

I work in Europe (as a Company Director) and do not think that this is the whole truth.

Shareholders/Boards have the final say - just as in the US. I believe that companies in the US have to give notice of plant closures and other major events, and the same is true in Europe.

Steve Z writes:

Pat answer: Shareholders are fixed residual claimants. Extraction of quasi-rents from bondholders and employees is not a problem, because they can contract for greater protection. Shareholders don't have that capability, so fiduciary duties protect them.

Tracy W writes:

Maybe I'm not up on recent management theory, but I thought a more fundamental problem was that if someone has multiple lines of accountability, with no set of priorities, they aren't really accountable to anyone. If A is being managed by B, C, and D, then if B, C and D want conflicting things A can just play them off against each other and do whatever A wants.

In other words, Greenfield's implied proposal would give more power to CEOs and senior management.

(While working for an organisation that shall remain nameless, I got very good at picking reviewers of my papers so as to get contradictory advice so I could then write whatever I thought best.)

Michael Rulle writes:

Not only have I disliked the term stakeholders, but have come to dislike the word "shareholders". I prefer the term owners. From the clarity of that word, much is easily deduced.

Tom West writes:

While there are no doubt counter-examples, it seems rather more likely that the share-holders are far more likely to loot the company by demanding management strategies that raise short-term profitability over long-term viability.

My personal experience is that its the workers who are far more concerned about the companies viability in the 10-40 year timeline. At least among my acquaintances, the desire to be a "lifetime" employee is quite strong.

If there's a primary criticism about worker-representation, I think it would be that it might push a corporate conservatism that prizes stability over growth.

Shayne Cook writes:

@ Tom West:

Sorry Tom, I can't help picking on you. Please accept that I intend it, as previously, to be good natured ;)

"Corporate Shareholders are far more likely to prefer short-term profitability [at the expense of] long-term viability?"


As I've said before, I am a hard-core capitalist investor (shareholder). And a very successful one, I might add. And I can assure you the thing I focus on, in order to be a successful investor, is long-term viability.

And the means I apply to look for and verify that, is to examine how short-term profitability reports are derived. I closely examine and question short-term profitability reports. Is that short-term result robust, or is it just accounting trickery? Accounting tricksters need not apply!

But you do have a valid point. Just making the accounting look good - to display/imply a short-term viability - does NOT indicate long term viability.

I wonder then, Tom, do you apply that same standard to the national governance you prefer, or do you only apply that standard to corporate governance?

If you check, you'll realize the current U.S. government, and several past administrations as well, were focused intently and exclusively on making their currently reported, short-term accounting (GDP) look good, at the expense of the long-term viability of the U.S. economy.

I don't tolerate that "short-term pretty accounting" focus in the companies I own, and I'm growing increasingly unimpressed with that "short-term pretty accountancy" focus of the government I own.

I FIRE corporate executive teams that attempt that pull that nonsense on me. And I'll FIRE the public servants I have that try to do the same thing. The difference, of course, is that I can FIRE any mal-focused corporate executive team at any point in time that the stock market is open. I only get to vote to FIRE my national executive management team every four years.

Jaros writes:

In practice workers influance is less than the impresion of these regulations for someonen who doesn't live in such a country. This is at least the case in the Netherlands. Workers representation counsels influance depends on the degree the employer chooses to listen to them, or they are a minor annoyance to the employer.

Shayne Cook writes:

There is a very great fallacy underlying all of the assertions of Greenfield, and ALL of the related discussion. That very great fallacy is the presumption that labor/employees and shareholders/owners are somehow mutually exclusive groups!

In order for ANY of Greenfield's assertions to be valid, or even conceptually meritworthy, U.S. law would have to be in place that precluded employees from being shareholders (owners), and vice-versa.

Under current U.S. law, shareholders are indeed defined as owners of the firm. Additionally - and this is absolutely unique to the U.S. legal structure - owners are granted rights to both proceeds AND control of what they own - exactly commensurate with the relative share of ownership. But U.S. law DOES NOT preclude or even restrict who may become owners, and thereby gain those ownership rights! Those rights extend even to foreign suppliers of equity capital!

So Greenfield's thesis and assertion that "employees" are not well represented in corporate governance under current U.S. law is a bald-faced LIE! And even the implication that employees are somehow discouraged from being owners (ostensibly by us sick, vicious, self-interested capitalists) is an additional bald-faced LIE!

Every U.S. publicly-traded company I am aware of, own, have owned, ever will own or have ever been employed by STRONGLY ENCOURAGES, and in fact SUBSIDIZES EMPLOYEE STOCK OWNERSHIP!

Floccina writes:

If it a public company the employees can buy shares in the company. I think that the UAW should have tried to buy a controlling share of GM long ago.

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