The next logical step toward stakeholder capitalism
With the rise of employee activism and many corporations facing this new trend, what if the next iteration is employees on the board of directors?
The notion is as simple as this: designate one or two board of directors seats to employees, and allow them to be a part of the discussions and decision-making as a means to better representation, ethics, and equity. After all, employees are stakeholders in the company, too, so logically this makes sense.
When the Business Roundtable, a group of the nation’s top CEOs, encouraged businesses to embrace all stakeholders (not just shareholders), many analysts were left asking “what’s next?” Shifting from a shareholder only view to a stakeholder one was a big statement, but the substance was lacking. A substantive next step is to encourage businesses to add employees to their boards of directors.
While it’s nearly unheard of in America, many companies overseas have experimented with employee board representation. In Germany, companies with more than 2,000 employees delegate half of their supervisory board seats to employees. France took a big step in 2013 with the creation of a law to give board seats to employees as an equal rights effort.
However, what is the likelihood of this practice being adopted in America?
Employee Representation: Growing Interest in the U.S.
While some may believe this new idea is radical in the United States, others believe it is the next step toward inclusiveness, diversification and simply a smart move for corporations that wish to stay more in tune with their employees’ needs.
One best-selling author is exploring this very topic in a book that has already been released in Europe and will debut in early 2020 in America. Thomas Piketty’s latest book, Capital in the Twenty-First Century, argues in favor of corporations giving half of its seats to employees as a measure to include them in the company’s overall strategy and to provide quality information.
Earlier this year, Sen. Tammy Baldwin (D-WI) introduced legislation, The Reward Work Act, to elicit healthier decision-making among corporations with at least one-third of seats to belong to employees. It would require the Securities and Exchange Commission and the National Labor Relations Board to create regulations to include employee representatives within two years of the act becoming enacted.
Also, as the presidential election nears, I believe this topic will emerge more strongly, especially as some candidates argue for greater corporate accountability.
Why Leaders Should Consider Employee Representation
The argument for employee representation on boards is compelling, especially in the face of growing employee activism. The rise of this trend demonstrates that employees have a deeper interest in their jobs and the impact of the companies they work for. With leaders confronting employee activism as a new part of corporate culture — think Amazon, Google, Salesforce, and Facebook — I believe examples of employee board representation will emerge well before it is required by law.
Today, business leaders are working through issues of ethics, equity, and longevity. Employees provide an essential perspective in navigating each issue.
Ethical Strength
Facebook faces criticism on how they handle political ads. Mark Zuckerburg is facing an ethical dilemma without much success. It might be time for him to listen to his employees.
Recently, hundreds of Facebook employees signed a letter sharing the same concerns for the company’s negative impact on U.S. democracy. While expressing concerns, they also outlined six proposals to overcome the ethical and political concerns. Think about how different Facebook policies could be with employees on their board of directors. They are citizens in two respects — the U.S. society and the Facebook workplace. Their voice could help the company gain ethical strength in decisions involving political ads and free speech.
If your goal as a corporation is to set the ethics bar as high as possible, employees on the board will help move the organization forward. Research has shown that employees on the board of directors lead to greater accountability in ethical decisions (Balsmeier, Bermig, & Dilger, 2013).
Greater Equity
Business leaders today are increasingly mindful of ensuring gender pay equity and developing better diversity and inclusiveness within their organizations and boards of directors. Adding employees to a company’s board of directors can help on both fronts.
Peter Drucker, the famed leadership thinker, said the CEO-to-worker pay ratio should not exceed 20 to 1. Otherwise, resentment will rise, and morale will fall. Today, the U.S. CEO-to-work pay ratio is about 339-to-1. When compared to other industrialized countries, the U.S. ratio is four times higher for CEOs. Remember how employees in some European countries serve on boards? Well, research supports how employee representation on boards of directors results in more balanced pay ratios.
In a recent report by Corporate Women Directors International, the U.S. lags Europe in the growth and representation of women on boards of directors. In 2018, evaluating the Fortune Global 200 companies, women directors on European company boards stood at 32.1% compared to 26.3% in the U.S. Imagine how quickly this statistic could change by adding women employees to the boards of directors?
Long-Term View
Short-termism is an issue within many startups and large corporations. Quarterly revenue and profitability drive too many decisions. Jamie Dimon, chairman and CEO of JPMorgan Chase, and Warren Buffett, chairman, and CEO of Berkshire Hathaway stated that companies need to embrace a long-term view. They suggested eliminating quarterly guidance and focus on a long-term roadmap for the company.
Why do long-term views matter? In a 2017 McKinsey study, they found if U.S. companies had adopted a long-term view, like their overseas counterparts, 5 million jobs would have been added, and an additional $1 trillion in GDP from 2001 to 2015 would have been the result. Employee representation on boards of directors will help shift the corporate mindset to a longer-term view and actions. Employees want to be a key part of a long-term growth strategy.
Employees Add Substance to Shift to Stakeholders
American corporations should rest assured that this practice has been in place in several European countries for some time. They are already ahead in perfecting this process, and their work to implement it can be used as a model for the corporations who want to follow suit. American companies can learn, adapt, and position their growth to engage an equitable, ethical, and sustainable path forward.
Whether it’s Piketty’s new book or the presidential election that pushes this topic to the forefront of a national conversation, leaders should take note — employee representation on boards discussions will emerge more prominently in the coming years. Embracing the trend might mean embracing employee activism in its latest form.