Should Corporations Be Democratic?

It can be easy to forget what a corporation essentially is. We may all have preconceived notions about what a corporation should do, but, ultimately (and historically), a corporation is simply a group of people engaged in some kind of enterprise that are legally recognized as a distinctive entity. It is common enough to think that a corporation should primarily focus on maximizing its returns for shareholders, but obviously the business world is more complicated than the narrow view of earnings. We saw this last week with Elon Musk highlighting that he is willing to prioritize political principles over profits. A similar question was raised regarding the future of OpenAI when its board of directors was forced to rehire its CEO after employees threatened to leave. This tension between profits and principles gives way to an interesting question: Should corporations be democratic – should employees have a direct say over how a corporation is run? Is this likely to result in more ethical corporations?

There is no fixed notion of what a corporation is for or how it is supposed to be run. Typically, a corporation is governed by a board of directors who are elected by shareholders and who appoint a CEO to run the company on their behalf. Typically, this creates a structure where executives and managers have a clear fiduciary responsibility to act in the interests of shareholders. This can create tension within a corporation between management and labor. Whereas the owners and managers seek to maximize profit, employees seek higher wages, greater benefits, and job security. But would it be better if the gap between workers and owners were erased, and employees had direct democratic influence on the company?

Industrial democracy is an arrangement where employees are capable of making decisions, sharing responsibility, and exercising some authority in the workplace. Giving employees a democratic say can be done in many ways. A company could include employees in a trust where that trust controls the corporation’s shares and thus the board of directors. Another way employees can engage in democratic control over a corporation is by establishing a cooperative where every employee owns a share. Finally, a third form of industrial democracy takes the form of “codetermination” such as is practiced in Germany where any corporation with more than 1,000 employees must be given representation on the corporation’s board of directors.

Defenders of industrial democracy argue that the practice would ensure employees have a more meaningful influence on their workplace, giving them greater say over how corporations are run and what their wages will be. They further argue that this can lead to higher wages, less turnover, greater income equality, and greater productivity. For example, Mondragon – one of the largest worker cooperatives headquarters in Spain – allows their employees to vote on important corporate policies. They have, for instance, enacted regulations that require that wages for executives be no capped at a certain ratio compared to those making the lowest wage.

Some have argued that efforts to democratize the workplace help to offset the lost influence and bargaining power that’s come from the demise of unions. It’s possible that some forms of industrial democracy could be an alternative to unions where rather than creating a countervailing power to management, individual employees can enjoy a seat at the table. In this way, employees might become more invested in the company, and also potentially prevent disputes and conflicts between employees and management.

Supporters of industrial democracy argue that reforming the corporate governance system is necessary because the standard model contributes to economic underperformance, poor social outcomes, and political instability. Giving employees more say can make them more enthusiastic about the company. It may also be especially desirable in a case like OpenAI’s where there is concern about how the AI industry is regulating itself. Greater employee say could even encourage greater accountability.

On the other hand, critics worry that increasing democracy in the workplace, particularly if required by law, represents an unwarranted interference with business practice. Obviously, people on different sides of the political spectrum will differ when it comes to regulations mandating such practices, but there may be a more fundamental ethical argument against granting employees representation on a board of directors: they don’t deserve it. The argument that investors should have representation follows from the idea that they are choosing to risk their own funds to finance the company. Given their investment, the board and corporate executives have the right to dictate the company’s direction.

In the abstract, critics of industrial democracy argue that it will undermine the business ultimately because employees will be incentivized to work to their own self-interest rather than what is best for the company. However, in practice perhaps one reason for not adopting industrial democracy is that it doesn’t necessarily have a significant impact on business practices in areas where it is practiced.

A 2021 study from MIT found “the evidence indicates that … codetermination is neither a panacea for all problems faced by 21st century workers, nor a destructive institution that appeals obviously inferior to shareholder control. Rather, it is a moderate institution with nonexistent or small positive effects.” When employees have a stake in the company, they tend to behave more like shareholders. If their bottom lines are affected, there is no reason to think that an employee-controlled corporation will be more inclined to act more ethically or more cutthroat.

In other words, the greatest argument against increasing workers’ say in the workplace may be that it simply won’t have the positive effects on corporate governance that might be hoped for. Even with direct representation on the board, that does not mean that this will equate to any kind of direct control over the corporation’s practices, particularly if they are in the minority. Union supporters have long argued that rebuilding union strength is a superior alternative to increasing employee representation.

It is worth pointing out, however, that even if workers don’t invest money directly in a business, they do invest their time and risk their livelihood. Perhaps this fact alone means employees deserve greater voice in the workplace. While representation on the board of directors won’t necessarily lead to dramatic change, numerous studies have shown that it can supplement union and other activities in increasing employee bargaining power. Thus, while it may not be a full solution to improving corporate governance, it might be a start.