The idea of “stakeholder capitalism”—with employees being one key stakeholder—might have more teeth if workers had a representative in the boardroom who could participate in discussions and decision-making.
That’s a legal requirement for certain types of companies in European countries, including Germany, Norway, Sweden, and France. But the practice has been rare in the US, apart from a period in the 1980s and 1990s when financially troubled firms in industries including airlines and trucking offered board seats as a bargaining concession to workers.
To understand what employee representation on boards achieves and whether it could get new momentum in the US, we spoke with Thomas Kochan, a professor at the MIT Sloan School of Management and faculty member in the MIT Institute for Work and Employment Research. Kochan formerly served as a representative of employees on the boards of Transcon and Smith Trucking. Here is a transcript of our conversation, edited for clarity:
Why should companies have employees as members of their boards?
There are several reasons for this. One is that employees can add value and expand the agenda that typical boards of directors discuss by bringing information from what the workforce is saying, feeling, and experiencing into the discussions. It helps bring new information to board decisions. Often, in my experience at least, it allows the member to suggest issues that might be discussed at future board meetings that typically haven't been on the agenda. The second reason is American workers now want a seat on boards of directors. The evidence is growing. We did a survey that asked 'What form of representation would you prefer?' And representation on boards of directors came out positive as something that workers want. So there is a growing expectation that workers want a voice in the key decisions that shape the company, not in a necessarily adversarial way, but in a way that their voice is heard and that they can help hold the company accountable for adhering to its values.
Does having a worker representative on a board correlate with any difference in company performance, worker engagement, or any other things that companies care about?
There are two bodies of evidence. One is much more quantitative and well grounded, but it comes from Europe. Colleagues have carefully studied with an experimental design the effects of board representation in Germany, where there are requirements that companies have board representatives.
In Germany, a colleague of ours, Simon Jäger, used a very creative research design when the law changed for companies with 500 employees having to have representatives on their board. Through careful econometric work, they found that companies with board representation invest more for the long run. They don't necessarily have higher wages and benefits, but are more productive because of the longer-term investments. That's the most careful study of this that I've ever seen.
The second body of evidence comes from more qualitative, personal evidence from the 1980s and 1990s when a number of US companies turned to board representation when they were in financial trouble as a wage concession. This happened frequently in the airline industry. United Airlines was the biggest example, but others followed suit. In the trucking industry also—industries after they got deregulated and ran into all kinds of difficulties.
So you saw a number of people put on boards as representatives of the workforce and the union. I served on two of those trucking company boards. What we learned is that if it's just looked at as a financial transaction where now we expect a role because we took a concession and, by god, we're going to have a stronger role and it stays adversarial and you have leaders or people on those boards who don't really understand how boards work, it had no effect. But where you changed the culture of the organization to reflect the desire of employees to have a stronger voice and really brought it down to the workplace level, you had a better chance of success.
I served on two company boards in the trucking industry. They were clearly financial deals. The board of representatives and the CEOs were not really interested in extensive employee engagement. In both cases, we had to find a merger partner. In the first instance, it was relatively easy. But in the second instance, we had to fight real hard not to sell the company to a disreputable firm that we knew was just going to strip the assets. We could stop bad behavior and then be part of a process to find a a better partner. So it's those experiences that I'm referring to.
You can do some things on the board even though you're not a majority representative to at least make sure you hold the company accountable for fulfilling its obligations and not engaging in practices which will injure the employees or the company itself. But without the commitment to really fundamentally change practices at the workplace level and throughout the organization to build a culture of ownership with employees, it has limited value.
It's interesting that you actually have direct experience of this because it's such a rare thing....
Yes, it's a rare thing. And I've seen it with others as well. The steel industry, the airline industry, and the trucking industry were the three industries that had the most employee board representation in the 1980s and 1990s. And also in the auto industry at Chrysler. But that was an example too where the UAW with the representatives on the board really didn't have much of an effect other than at the margins because they just didn't build a culture of ownership. United Airlines was the worst. That was adversarial before employee representatives went on the board, adversarial after they went on the board. Eventually both parties gave up on it and negotiated it out in a subsequent contract negotiation where there was more money to share in standard negotiations.
So it has this mixed record in the United States. But the mixed record reflects the failure of the organizations to really see the potential benefits of employee ownership and to change the culture of relationships to capture those benefits. And that's where I think the potential for board membership lies.
What is the status of employee representatives on US boards today? I've struggled to find any examples of it in public companies.
It's not surprising you have a hard time finding data on it because there's no database that tells us how many companies have employee board representatives. You find it where there are employee stock ownership programs (ESOPs) and there are a number of those. But they're kind of under the radar. I think they're going to grow as there are some new groups now that are committed to really promoting employee ownership. And I think as part of that we will see more experimentation with worker representatives of one form or another. But it's pretty much limited to those settings right now and a few startups that are thinking about this. It's at a point where there's a lot of discussion of it, and I think there'll be some experimentation in the broad sense of an experiment with more of this. But there's no place you can find an inventory of where this exists.
It's also a bit of a myth that labor law doesn't allow you to put employees on boards of directors. Basically labor law in the United States on this is silent. It doesn't prohibit it, it doesn't support it or endorse it, and it certainly doesn't require it. It basically allows it, certainly if a union and a company agree to put a worker representative on the board. There's no question that that's legal. But even in non-union settings there's really nothing in the law that clearly prohibits it. There may be some constraints in how it's structured, but there's a general sense that it's allowable. It just wasn't anticipated by our labor law.
Based on the experience outside of the US and your own experiences with employee representation on boards, what would you say are the best practices for how it is implemented?
The best practices are to make sure, number one, that you have worker representatives who are trained in how boards work. How do you have influence on a board? What's the culture of board decision making? Understand it doesn't mean that you can't bring about change, but one has to understand that it's not a bargaining relationship. It has to be that you bring power and influence to a board of directors by bringing information that others don't have, and then communicating that information in a way that others will hear it, accept it, and maybe begin to support it and ask for more of that kind of information. That's the way you can build trust with the other members of the board. So we have done some training of some workers who their organizations aspire to have on boards of directors.
But then if a worker or union member—or whoever it is—is on the board of directors, it's absolutely essential that the company then commit to changing practices or implementing practices that build a culture of participation from the workforce. Then employees have a sense, not only a sense of ownership, but it's reinforced that their ideas are asked for on how do we improve, or there are structures at the workplace that work on issues of importance. And then that has to be reflected in how they deal with each other and collective bargaining, so that they don't just fall back into a traditional arms-length process. But they share information in bargaining about where the company is going and what the issues are and how to bring employee concerns into the bargaining process. Then that information has to filter up to the board discussions through the designated worker representative.
In my own experience, if you can get a couple of other board members to see the value of this, then they also will share. Or you might even set up a committee on workforce relations. Then that institutionalizes it within the firm, from the grassroots right up to the boardroom. Then you've got value-added representation and it can really have a positive effect. But standalone put a person or a couple of people on the board of directors, the best you can do is avoid bad things. Then you've got to fight hard to avoid bad things sometimes. That's a useful watchdog kind of role, but that's not adding new value in the sense of really enhancing the performance of the firm and the welfare of the workforce in the long run.
How does worker representation on corporate boards relate to unionization?
It's possible to have one without the other. I think it works best where workers have some formal representation, probably a union since that's the model we have in the United States at the moment and have had historically. That allows you to aggregate worker interests and to have a structure for figuring out who should serve on the board, whether it's an employee, or sometimes it's an outsider, sometimes it's an academic—like I've served, or other colleagues have. Sometimes it's a former union leader like Doug Fraser who was the president of the auto workers and served on the Chrysler board or Lynn Williams, a very effective president of the steelworkers union who served on a number of boards in that industry over time.
Having someone who is respected by the workforce and is not controlled—in the sense that that person has to consult and only reflect the workers' views or the union's views—is really important because that representative has to speak truth to power on both sides. They have to speak to other members of the board and say, 'This is real. This will really be a problem if we do this, but if we approach it in a different way, we might be able to meet our objectives.' And they go back and communicate with workers in some way so that they don't feel that we've got somebody up there, but we never hear from that person and also communicate appropriately with respect for confidentiality. 'Here are some things that we are doing on the board that you should be aware of that I'm anxious to hear what you think about.' You have to have that kind of communication and have communication channels to support that. A union structure provides the easiest route to do that.
You earlier said that worker representatives can bring certain types of information to board discussions. Can you think of good examples of that?
In the retail industry there was an effort to get workers on the board of directors of Toys R Us after Toys R Us went into bankruptcy and went through a bunch of restructuring. There were good discussions with retail workers supported by labor groups. In this case, it was labor advocacy groups. We did some training with them and they had discussions with the CEO about a 'mirror board' and convinced the CEO that this was really a good idea, even though he couldn't quite get his board and the private investors who were controlling it to go with formal board representation. They were about to open some stores and he was hearing what the workforce had to say about how you do this, how you staff that, how you move it forward, how you could really build the kind of high-quality workforce that was needed.
It's that kind of information. It's that kind of input that really matters and that you don't get necessarily top down. You can do engagement surveys and the HR department can do all of those things. But being able to say: 'You know, I spent time out there on the front lines, in the stores or on the shop floor in a manufacturing facility, and I've talked with the workers, and this is what they're saying. There's a lot of energy there, but these are some real concerns that we've got to deal with because there are some problems out there.' In one of these situations, there were some real safety issues that were not rising to the attention of the executives.
And I said, 'I think we have some significant issues here, but I haven't seen a safety report at our board meetings to this point. I wonder if we couldn't have our HR department and the safety department give us a report next meeting or as soon as they can on how we are doing relative to our peers. Particularly in some of these areas where I'm hearing about all kinds of ergonomics issues.' And the board said, 'Well, sure, let's do that.' That created a routine. We now expanded the agenda and on a quarterly basis, we got a report and we got improvements, and it generated action. It generated action by exactly the professionals you want: the safety and health experts and the HR people who know how to do this.
They were empowered to bring about changes because of this. So it's that cycle of influence. But you can't go into the board and bang your fists on the table and say, 'We've got a real problem.' That comes from being credible. If that request for more information led to others to see that I was somehow making this up out of thin air my credibility would have been lost. So you've got to bring real information.
Are there other mechanisms for integrating employees in corporate governance that you think merit consideration besides employee representation on boards?
Yes. We've seen this work in more informal ways very effectively with quarterly meetings or monthly, some periodic meeting between the chief executive and the executive team and workforce leaders. It's usually union leaders, but often they will bring in—maybe even at the request of the CEO—a team of workers who show up and just have them talk about what's on their mind. We saw a lot of this in the 1980s when there was a lot of innovation going on in labor management relations.
And we still saw it in places like Kaiser Permanente, a national healthcare organization located in California. They've had a labor-management partnership, which was formed in 1997. And it still exists, although it's a little rocky at the moment. We worked with them, we studied them, we wrote a book about them. You have teams at the at the frontline—they call them unit-based teams—where the docs, the nurses, the technicians, and the service employees meet on a monthly basis in a small team to work on whatever operational problems are critical at the moment. So you've got that workplace participation, and then you have a labor-management team, a governance process which brings the union leaders and the management negotiators together on a periodic basis. Then there's periodic meetings with the CEO and they're sometimes invited into the board of directors or in the coordinating committees between the physicians organization and the the insurance side of the business.
It's that kind of structure of shared information, of joint governance—in some ways not formal authority to say that the union representatives can veto actions, but they can inform and share information and know what's going on in the business and learn about the business problems. Then carry that throughout the organization to build that culture. That's what we need now, There are European models that also work better called 'works councils.' These would be councils of elected workers at the workplace level. So a retail store like Walmart might have a council at the store in Springfield, Massachusetts, or wherever. Doing that outside of a union is illegal in the United States. And I think that's unfortunate.
I would never argue that we should have a surgical change in law just to allow that, but as part of a comprehensive updating and fixing of our labor law, we ought to build those kinds of consultation processes in. Because that's where you build the the confidence, that's where you build new leadership, that's where you get ideas and problem solved. It builds a more inclusive process. So it's not just one person or two people, or a small number at the board level acting in isolation, but it's more integrated with actions right down there. For example, in the Starbucks case, the evidence is pretty clear. Most of these Starbucks employees don't hate Starbucks.
They don't even necessarily dislike the CEO, although that may be changing given his behavior. But setting that aside, they want Starbucks to live up to its values. They want to serve their customers better. They think they've got something to offer and to say, and they want to be treated with respect as real partners. So that's the opportunity we have in front of us right now. There's a generation of workers who don't respect the limits of labor law. They don't understand that. That's not the labor law that they had anything to do with, and they want new forms of voice. We've got to find a way to open up our law to these new forms.
If workers or leaders of organizations are interested in employee board representation, what should they do? Are there any specific places they should go for information or support?
Ownership Associates is a consulting organization that has worked with ESOPs and the president of that is a friend of mine named Chris Mackin. They have worked with companies and worker groups to help set up ESOPs and help set up shared governance arrangements like this. This new group Ownership Works is really working to develop that kind of expertise. We have put on training at MIT for board members. I'm not arguing or soliciting more work or business, but I believe very strongly in this. I've worked with some employee advocates on how you think about the role along the lines we've talked about, but I'm not unique. If we could develop a group of trusted business leaders, organizations who could work with companies, provide information like this, assuage some of the fears and some of the myths but also help build the base for real effective corporate governance and employee participation—I think it would be great. And I think the time is right to.
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