What We Do and Don’t Know About Worker Representation on Boards

Appointing workers’ representatives to company boards may be an idea whose time has come.

Politicians seem to like it. The most recent politician to make such a proposal is U.S. Senator Elizabeth Warren who would like to require companies with more than $1 billion in revenue to let workers elect 40% of board members. Before Senator Warren, a politician from the other side of the Atlantic and the other side of the political spectrum, Theresa May, pledged during her campaigning to be Prime Minister in 2016 to allow workers to be represented on company boards. Since becoming Prime Minister, she has not followed suit, though. And French President Emmanuel Macron, after months of confrontation with labor unions on his labor market reform, is considering changes to the corporate governance to, among other issues, strengthen workers’ participation to company boards.

Academics are also taking a fresh and closer look at the issue: a new academic journal specifically focused on employee participation just published its first issue last month. But what do we know about the impact of workers’ participation to company boards on workers and companies?

There is no one model for worker representation on boards. Board-level employee representation appears to be quite fashionable, but so far remains mainly a European phenomenon with Germany often seen as the role-model. Its impressive row of good employment numbers, even in the darkest days of the global financial crisis, is often explained by a consensus-based style of labor relations and workers’ participation to the supervision of company management. However, Germany relies on a specific corporate governance model which is not widespread in other countries: the dual-board system. Workers in Germany sit on the supervisory board, not on the board of directors.

Of course, there are other models of workers’ participation than the German one. In the OECD Employment Outlook 2017, we have shown that forms of employee participation in the management of private companies are also present in Austria, Denmark, Finland, France, Hungary, Luxembourg, the Netherlands, Norway, Poland, Slovakia, Slovenia, and Sweden. In Chile, Greece, Ireland, Israel, Poland, Portugal and Spain workers’ representatives often sit on boards of state-owned companies. In some of the countries just mentioned, workers sit on the board of directors, in others they sit on a supervisory board. In some cases they are appointed by labor unions, sometimes they are elected directly by the employees, in other cases they are selected by other employee committees. There is no single or dominant model of worker representation to be easily imported from one country to another.

Corporate governance is just one part of a “package” of economic institutions. As Raffaela Sadun pointed out recently here at HBR, importing single institutional features from abroad rarely works. There’s a growing recognition among scholars that what matters most is the functioning of the “entire package” of a country’s economic institutions, and that changes at the margins rarely have the intended effect if they are not part of a broader framework. Moreover, institutions, even more those regulating relations between the management and the workforce, depend not only on written laws but on decades of practice and trust that cannot be easily or quickly changed by policymakers.

Poor relations between labor and management lead to higher unemployment. Employee participation on company or supervisory boards can strengthen workers’ voice but, critically, it can also improve cooperation with management. That’s important because studies show that trust between employers and employees as well as good labor relations are key factors for maintaining low unemployment. By taking an active part to the life of the company, workers and management can engage in win-win negotiations at times of economic difficulties as workers are more aware of the constraints a company is facing and the rationale behind the choices made. For instance, a study for Denmark, Sweden, and Norway during the recent financial crisis shows that companies with workers on their boards were better able than other firms to negotiate alternative ways of reducing labor costs then mass firing.

Employee representation on boards is neither hugely positive o negative for corporate performance. Beyond specific studies, an extensive review of the literature of the impact on company performance — not surprisingly mainly based on studies in Germany — shows that there is no clear correlation (let alone causal evidence) between the presence of board-level employee representatives and better or worse company performance.

Moreover, major corporate scandals in Germany, such as the recent “Dieselgate” and the resignation in 2005 of Volkswagen personnel chief Peter Hartz (who was also the mastermind of the acclaimed German labor market reforms by Chancellor Gerhard Schröder) amid allegations of bribing labor leaders, show that workers’ presence on boards is no guarantee of more ethical companies.

Does this mean that having workers on corporate boards is a good or a bad idea? The evidence suggests that it’s not a silver bullet and that we should should keep our expectations in check when considering reforms that require it.

The opinions and arguments expressed here are those of the author and do not necessarily reflect the views of the OECD nor of its member countries.