Employee participation in corporate governance refers to a range of institutions, voluntary or legally mandated, that engage employees in corporate decision-making. Examples include works councils with co-decision powers on labor matters, advisory panels, information and consultation committees, employee share ownership schemes, and board representation. In the US, Senator Elizabeth Warren put forward the Accountable Capitalism Act, Section 6(b)(1) of which provides that employees of large corporations must elect at least 40% of the board. Such interventionist approaches are becoming increasingly popular in the US, by focusing on the redistribution of wealth maximization and the reduction of income inequality for the benefit of employees. The COVID-19 pandemic has also spurred criticisms against large corporations, such as Amazon, for their failure to engage constructively with employees and their facile resorting to redundancies. The ramifications of this pandemic have revitalized the debate around corporate purpose and have highlighted the urgency of reconceptualizing shareholder-based governance. Interventionist approaches may, of course, be useful to increase regulatory visibility and the utility of legal reforms for public consumption purposes, as they will be successful in conveying the message that the balance amongst shareholders and employees, or income inequality, can be achieved via such reforms. Nevertheless, we argue that they are not economically efficient in the long term.
Corporate contractarian literature (Jensen and Meckling, Hansmann and Kraakman, Cheffins) dismisses employee participation as inefficient because, if it were efficient, it would be voluntarily adopted on a large scale. In our paper, we argue that the scarcity of employee participation in Anglo-American corporate governance can be attributed to shareholder short-termism and behavioral biases and, therefore, that the question of its efficiency remains open for companies that want to explore this possibility.
Admittedly, there is still no academic consensus on the degree of severity of the problem of short-termism in capital markets. Roe recently argued that, although there has been a dramatic rise in share trading, as anticipated by those believing that short-termism drives capital markets, the predicted negative impact of short-termism has not materialized. This is substantiated by evidence of extensive R&D investment by US tech-oriented companies, such as Amazon, Apple, Facebook, Google, and Microsoft. However, most of these companies are controlled by their founders, often through devices such as dual-class shares, and thus are not typical ‘Berle and Means corporations.’ It is evident that the preferences of controlling shareholders are likely to be long-term-oriented.
In light of these developments and the idiosyncrasies of US corporations, we argue that the most pragmatic way to encourage effective employee participation is through the introduction of formal and permanent employee advisory panels and, in the longer term, the proliferation of employee share ownership schemes coupled with special rights to appoint a number of directors in tandem with the size of employee share ownership. Our approach relies on an incremental participation model, whereby employees should first be given a dialogue channel through advisory panels to gain adequate experience before appointing board members.
Our proposal is also consistent with long-term trends in many US states that shield corporate management from short-term shareholder pressures, such as constituency statutes that permit directors to defend hostile takeovers in circumstances where the takeover would be against the interests of non-shareholder constituencies, for example, employees and local communities. In Delaware, case law permits directors to defend hostile takeovers when the defense is reasonable concerning the threat posed by the takeover to the corporation. For these purposes, long-term enterprise considerations include not only shareholder welfare but also matters such as the reputation of the enterprise and the interests of other constituencies.
Employee advisory panels
Employee advisory panels should be introduced in a flexible manner:companies are free to opt for their own elections processes under the condition that a system of direct employee vote is put in place. Advisory panels would need to be given a clear and continuous operational mandate based on each company’s profile, size, and activities.
Such panels have the potential to improve corporate decision-making through the inclusion of the employee perspective and to enable employees and their representatives to develop the necessary skills to act as effective governance players. Panels should be conceived and introduced as ‘preparatory labs’ for the inculcation of leadership skills by employees that will be called upon to assume decision-making roles within companies in the future. The educational benefits will thus be shared amongst the board of directors and the advisory panel, in the long run, preparing for the crystallization of such benefits via the second phase of our proposals that relates to the appointment of employee representatives to the board.
Employee share ownership schemes
Given the benefits of combining governance rights with residual risk, we argue that an effective model would be based on granting the right to appoint a number of directors to employees once the employees of a company collectively cross certain thresholds of share ownership. The purpose of the special appointment rights would be to provide for employee board representation in tandem with the extent to which they share the company’s residual risk.
Trade unions would include demands for employees to be given the opportunity to be paid part of their remuneration in shares on favorable terms within their future collective bargaining strategies. The government could further facilitate employee share ownership by expanding the relevant tax advantages. For instance, the monetary limits that apply for share grants to be exempt from relevant taxes could be increased.
The percentage of directors to be appointed by the employee shareholders would reflect the size of their combined equity stake, but in a regressive manner and up to a maximum of a third of the board. The more shares employees collectively have, the more significant the practical effect of their normal voting rights.
A new paradigm for shareholder-based governance in light of COVID-19?
Our proposal might appear to be in discord with the growing enhancement of shareholder rights in the US (say on pay, proxy access, majority voting and declassification of staggered boards). For instance, by amending the corporate by-laws of individual corporations, shareholders have gained the right to nominate a portion of the board (typically around 20%) via the corporation’s proxy card if they hold a certain threshold of shares for a period of time (typically 3% of the share capital for 3 years). Nevertheless, the empowerment of American shareholders does not constitute an obstacle to the voluntary adoption of employee engagement, as proposed by our paper. This is also because many US institutional investors are public sector or trade union-owned pension funds, which have long pursued an agenda of employee engagement and would, therefore, likely support our proposals.
In light of the long-lasting effects of COVID-19 upon corporations and employees, a long-term recalibration of corporate governance structures and corporate culture can only be realistically achieved by flexible and adaptable solutions, not by drastic legal changes. Our approach fosters the inculcation of a culture of trust between capital, labor, and management. This new paradigm, which is more compelling now than ever before, aims to accord a new raison d’être to shareholder-based governance with wider ramifications for the re-conceptualization of corporate law as a hybrid governance mechanism enabling the long-term engagement of investors, employees, and other stakeholders.
 Defined as corporations with total annual revenue of at least $1 billion.
 Paramount Communications v. Time.