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In the 21st Century, Rank-and-File Employees Ought to Serve on Corporate Boards

Salesforce (NYSE:CRM) co-CEO and founder Marc Benioff recently suggested in a New York Times op-ed that, “Capitalism, as we know it, is dead.”

It’s never good when someone who’s benefited so greatly from capitalism is ready to abandon it for something that would surely reduce his personal wealth. And while it’s easy to be cynical about Benioff’s declaration when he’s a billionaire several times over, he’s not the first wealthy person in recent memory to suggest the obsession with maximizing shareholder profits has gone too far.

According to Benioff, the 26 wealthiest humans on the planet have as much wealth as the poorest 3.8 billion.

In investment circles, this inequality first began to rear its ugly head when ESG investing began to gain traction in the boardrooms of institutional investors everywhere.

The “G” in ESG has to do with a company’s corporate governance as it relates to the operation of its business and its interaction with all of the stakeholders that are affected in one way or another by its activities.

Stakeholder Governance on the Rise

It really depends on the board of directors and their commitment to doing what’s right for everyone, not just shareholders.

As a result of this rising ESG tide, CEO compensation, and specifically the idea of reining in executive pay packages and curbing the rise of inequality, has become a front-burner issue for both academics and corporate America alike.

The Business Roundtable recently announced a revised “Statement on the Purpose of a Corporation”, a document that hadn’t changed in 22 years. Previously, America’s most influential corporate leaders believed that “The paramount duty of management and of boards of directors is to the corporation’s stockholders,” Quartz at Work contributor Lila MacLellan reported in August.

On Aug. 19, the Business Roundtable, led by JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon, released its new vision for the American, one that professes a “fundamental commitment to all of our stakeholders,” which includes customers, employees, suppliers, communities and shareholders.

CEOs from more than 200 corporations (with combined revenues exceeding $7 trillion) have signed this statement committing to deliver value to all of them.

America’s Boards Must Change

However, if American corporations want to succeed, they’ve got to start by reconfiguring who sits on a board, and more importantly, why they do.

Roosevelt Institute Senior Economist and Fellow Lenore Palladino argues in her September 2019 working paper, “21st Century Corporate Governance: New Rules for Worker Representation on Corporate Boards”, that a good place to start when it comes to 21st-century corporate governance is to give workers more of a voice in how major decisions are made at large corporations.

Over time, by electing rank-and-file employees to the board — we’re not talking about upper management here — worker representation on corporate boards should help curb inequality in corporate America. And by doing so, shareholders will win just as they do today.

“Workers are crucial stakeholders for the success of large corporations, the drivers of the U.S. economy,” Palladino states in the conclusion to her working paper. “The model of shareholder primacy—which resulted in only shareholders electing directors to corporate boards—is an incorrect model, and it should be replaced with a stakeholder theory of the corporation. In the stakeholder model, workers should elect and serve in substantial proportion on the corporate board of directors.”

Here in America, there are few examples of rank-and-file employees serving on the boards of large, publicly traded companies.

In November 2018, 20,000 employees at Google took to the streets to demand change at the company. The protests were the result of the company’s mishandling of sexual assault allegations against former executive Andy Rubin, including a $90 million payout to the creator of Google’s Android mobile software.

The Google employees who protested had a set of demands for the company. One of them called for an employee representative to be elected to Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) board.

A year later, nothing’s been done to meet this demand, but considering the push by the Business Roundtable to satisfy all stakeholders, it would seem appropriate that Alphabet should be one of the first to appoint an employee to its board.

Sadly, Alphabet hasn’t signed the Business Roundtable’s statement.

Follow Germany’s Lead

One of Palladino’s sources for her working paper is Massachusetts Institute of Technology economist Simon Jäger. He points out that workers in large German companies represent 50% of the board. Even mid-sized businesses of up to 2,000 employees elect workers to one-third the board seats.

Senator Elizabeth Warren’s Accountable Capitalism Act (PDF) requires American companies to have workers account for at least 40% of the board of directors, mimicking the success Germany has had narrowing the inequality gap between management and workers.

If it all sounds a little like socialism, that’s because in some respects it is … but that doesn’t mean it’s wrong.

As investors head into 2020, you’re going to hear more about stakeholder governance. A big part of that will center on employees serving on the boards of America’s largest companies.

It’s time employees took their rightful seat at the table. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/rank-and-file-employees-should-serve-on-board-of-directors/.

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