December 11, 2019 / 12:33 PM / a month ago

Breakingviews - Hadas: Workers on boards make good capitalists

LONDON (Reuters Breakingviews) - “When those who depend on a company have a say in running it, that company generally does better and lasts longer.” With that explanation, the British Labour party’s election manifesto promised to reserve one-third of board seats for elected worker-directors. It’s one of the reasons that capitalists fret about Jeremy Corbyn’s party winning Thursday’s general election. If a new study of German companies is any guide, though, those fears are misplaced.

The Boardroom, a meeting space for creatives and technology people from the community, is seen as media tour a new Apple store in Chicago, Illinois, U.S., October 19, 2017.

The study by Simon Jaeger, Benjamin Schoefer and Joerg Heining took advantage of a sudden change in German corporate law. Before August 1994, one-third of the members of the supervisory board of all incorporated companies with fewer than 500 employees were elected by workers. Similar companies founded after that date had no worker-directors.

The researchers, who work at the Massachusetts Institute of Technology, the University of California, Berkeley, and the German Institute for Employment Research respectively, decided to see if the shift in board composition affected corporate results. They studied companies founded within two years before and after the switch. They then compared how the two groups of companies developed over the following six years.

To isolate the effects of worker representation, the researchers compared both samples with another group of similar-sized companies, founded in the same years, which never had workers on their boards. The statistical manoeuvres required for such “difference in difference” studies are complex, but often worthwhile.

This study’s principal finding is certainly striking. By the end of the period, researchers found that the companies with employee representation had stocks of fixed long-term capital which were about 40%-50% larger than at their employee-less peers. In other words, putting workers on the board leads to significantly more investment. Wages rose more at the companies with shared governance, but only in line with workers’ productivity. Revenue growth was about the same for both groups, and profitability at the companies with workers on the board was either slightly higher or equal to the other group, depending on the measure.

In short, co-determination proved neutral to strongly positive for all the measures that matter to capitalists. Advocates of extreme free-market policies will find that observation hard to believe. They generally expect workers on boards to be self-serving, blocking job-killing investments and extorting higher wages for themselves.

Indeed, the view that workers get in the way of good management inspired the 1994 change in German corporate structures. And the assumption that workers and employers are always enemies helps explain why English-speaking economies have resisted co-determination.

The researchers offer a broader definition of self-interest to explain their findings. Employees want to work for world-class companies with strong cash flows, because such enterprises pay more than lagging rivals and are less likely to lay off workers. The authors also hint at a less utilitarian explanation. Sports teams generally do better when internal conflicts are put aside for the sake of the common goal of winning. Why would companies be any different?

Of course, there are caveats to this broad conclusion. The authors’ valiant efforts to ensure that the data is being interpreted fairly may not have been sufficient. Critics might argue that funding from the Washington Center for Equitable Growth might have influenced the researchers’ apparently technical adjustments.

More substantially, it doesn’t take a free-market fanatic to note that an arrangement that works well for relatively small German companies may fail in other business cultures. If co-determination was such an obvious source of competitive advantage, companies in other countries would be expected to adopt it – regardless of the law. Even in Germany, where the tradition is well established, it can go badly wrong. Some workers’ representatives on the supervisory board of car giant Volkswagen were involved in a bribery and prostitution scandal in 2005.

Britain may not be the most fertile ground for a German transplant. It’s true that industrial relations in the United Kingdom have moved on from the class warfare that dominated in the 1960s and 1970s, when Corbyn formed his worldview. But private sector workers have largely deserted labour unions, so responsible and respected worker representatives may be hard to find.

The near-total lack of support for the Labour party proposal among British companies suggests they are even less prepared to welcome workers into the boardroom. Financial investors suspect that for Corbyn and his fans the promise of worker-capitalism is more anti-capitalist than pro-company. Their resistance would be fierce.

Current opinion polls suggest Corbyn has little chance of fulfilling his election promise. Yet even a failed British experiment in co-determination would not prove the whole idea is fatally flawed. Rather, it would confirm something that doctrinaire economists of every school often fail to recognise. Economic success is too complicated an achievement to be guaranteed by any simple nostrum, whether untrammelled markets, a progressive tax system – or boardroom representation for workers.

Still, the idea that the modern economy works better when there is more cooperation and less conflict is more than a sentimental dream. Workers and capitalists may not always have the same interests. Ultimately, though, they are better off united than divided.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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