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 are excerpts from our conversation, edited for space and 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 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.
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.
It’s also a bit of a myth that labor law doesn’t allow you to put employees on boards of directors. 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.
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. Sometimes it’s a former union leader. 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.
Read a full transcript of our conversation, including more about best practices and resources for those who want to explore employee representation on boards.