Notice & Comment

Lifting Labor’s Voice: A Comprehensive Regulatory Agenda for Worker Voice in Corporate Governance, by Leo E. Strine, Jr., Aneil Kovvali, and Oluwatomi O. Williams

The dramatic decline in corporate gain sharing with American workers over the last two generations has contributed to stagnating wages, soaring inequality, and economic insecurity.  As one remedy, leading public officials concerned for working people have introduced legislation to provide workers with more voice within the corporate power structure.  Several reformers have proposed adoption of one element of an overall scheme of economic organization known as “codetermination”: the element that has a percentage of a company’s board of directors elected by the workforce.

This “board codetermination” proposal is in the Reward Work Act bill introduced by Senator Tammy Baldwin and the Accountable Capitalism Act introduced by Senator Elizabeth Warren.  It is also supported by Senator Bernie Sanders.

As we explain in our recent working paper, there are good reasons to question whether board codetermination can succeed in isolation.  In nations that practice codetermination, there is a coherent, legally required internal framework within which management and labor must work together to govern companies in a manner that benefits all stakeholders.  That internal framework is supported by a robust set of external laws and regulations that reinforce the need for corporations to treat workers fairly and that provide additional support to workers, reducing inequality and promoting economic security.

To show this, we explain how codetermination operates in key market-based economies like Germany.  There, top-down representation on corporate boards is accompanied by ground-up worker representation through works councils that collaborate with management to make decisions about issues like employee leave, terminations, working conditions, and relocation.  Codetermination also exists in nations where levels of unionization are higher than in the U.S., and where labor unions play a supportive role to both worker representatives on works councils and boards of directors.  Put simply, codetermination elsewhere is a comprehensive system that culminates, and does not begin, with board representation.  As important, codetermination elsewhere is accompanied by a corporate law that requires stakeholder-focused governance, and that thus requires all directors, be they elected by stockholders or workers, to advance the interests of all stakeholders and not just stockholders.

In this post, we highlight some of the regulatory implications of this analysis.

First, there are serious and contestable issues that will need to be confronted to install even a minimal system of board codetermination.  These issues include: a) which workers would be eligible to vote for directors; b) who would be permitted to serve as a worker director; c) how campaigns would be conducted; d) how elections would be administered; and e) how a board with worker directors would function.  The leading proposals simply delegate authority to administrative agencies—the Securities and Exchange Commission (“SEC”), in collaboration with the National Labor Relations Board (“NLRB”)—to resolve these questions.  But as we show, the questions implicate a broad range of serious practical and moral issues.  Such issues may not be within the expertise or ordinary experience of any agency.

Second, the analysis demonstrates that a comprehensive regulatory approach is needed to improve outcomes for workers.  Reforms to the internal mechanisms of corporate governance can be valuable tools, but they are more likely to be effective if they are supported by a robust set of regulations that enhance workers’ ability to collaborate with management on issues that matter to them, that improve workers’ ability to organize and negotiate collectively, and that encourage businesses to compete by investing in improving the productivity of workers instead of squeezing them harder. 

To that end, we surface policy initiatives that could be undertaken that would benefit American workers now, that would serve as a useful pathway toward an eventual system of codetermination, and that would make codetermination more effective when it is adopted.  These initiatives include:  a) requiring all large corporations in the U.S., public or private,  to respect the interests of all stakeholders, including workers, and to focus on sustainable growth; b) authorizing and mandating the Securities and Exchange Commission to require Employee, Environmental, Social, and Governance disclosure from all large companies and institutional investors; c) transforming board compensation committees at all large companies into board workforce committees with a broader responsibility to ensure fair pay and working conditions for all employees, not merely select officers and directors, and to oversee policies on pay, workforce diversity, equity, and inclusion, atmosphere, and safety, and corresponding disclosure requirements; d) authorizing these workforce committees to institute European-style works councils to increase worker voice and provide information to the board; e) enacting labor law reform reinvigorating workers’ rights to join a union and authorizing sectoral bargaining; and f) undertaking complementary reforms designed to ensure that the institutional investors who collectively control public companies behave in a manner aligned with the interests of the underlying human beings whose capital they deploy.  These measures would create a regulatory and business context allowing an eventual board codetermination system to function effectively, while improving conditions for American workers right now.

Third, reformers should consider leveraging state law and state courts.  In the United States, corporate governance issues have largely been left to the states.  Instead of displacing states entirely, a federal codetermination regime might require companies to incorporate under a state law regime that meets certain minimum requirements.  Similarly, the regime might leverage state courts to adjudicate disputes relating to corporate elections.  State courts have had a long history of fairly and efficiently adjudicating issues relating to corporate elections.  By contrast, the NLRB has long been a political football.  As a result, it has often lacked the tools or the will to make effective policy or to ensure that worker votes are counted and heard.

Board codetermination has the potential to be a useful tool, but only if it is part of a broader program of regulation and reform.  Close attention to the broader program and to potential administrative problems is necessary if board codetermination is to live up to its potential.

Leo E. Strine, Jr., is the Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; of counsel, Wachtell, Lipton, Rosen & Katz; and former chief justice and chancellor of the State of Delaware.  Aneil Kovvali is a Harry A. Bigelow Teaching Fellow and Lecturer in Law at the University of Chicago Law School.  Oluwatomi O. Williams is a corporate associate at Wachtell, Lipton, Rosen & Katz.

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