Complaints about corporations are not misplaced. Corporations in the U.S. are designed to give a small group of mostly rich, white, and overwhelmingly male executives most of the decision making power over America’s companies. Many board members are current or former executives of other companies, making board members a close-knit group of likeminded individuals. These board members see their duty as safeguarding and maximizing returns to shareholders by either increasing the value of the stock or returning a dividend. The focus on profit relegates the company’s workers, the environment, human rights, and even business decisions that ensure the long-term success of the company to secondary concerns. There are countless examples of this, think about how many U.S. companies move operations overseas for cheaper labor despite a lack of laws that protect workers from unsafe working environments or allow for child labor. There is also the most recent the decision by companies during the pandemic to not cut their dividend to shareholders while at the same time, laying off thousands of works, lowering salaries, and deciding to stop contributions to workers’ 401(k)s.
In order to improve U.S. companies, while at the same time avoided the need to pass countless laws, the U.S. should mandate that there is employee representation on company boards. This is already the law in many developed countries around the world, countries whose economies rebounded quicker than in the U.S. during past economic downturns. This is likely because there is more pressure on U.S. corporate management to cut employees when the economy turns down than in countries where employees have a vote in protecting workers’ rights. Right now, during an economic recession with corporations asking the government for support, it is the perfect time to put in place changes to improve the country for the long term.
Milton Friedman is credited with arguing in the late 1970s that a corporation’s only concern should be about maximizing return for shareholders. When Friedman made this argument the average CEO made a salary 30 times greater than their average employee, by the late 2010s CEO pay had risen to nearly 300 times greater than their average employee. While the disparity of pay between CEOs and their workers is concerning, of greater concern is that the average employee’s pay has increased slower than inflation over the past two generations. This big reward for company management is because the last 40 years have seen epic increases in the stock valuation of companies. CEOs have seen success not only from growing profits, but from cutting costs by lowering employee compensation, moving production to cheaper labor markets, and cutting corners on environmental protections (e.g. pushing the use of plastics that are not recyclable or pushing for cheaper gas so that more expensive and less efficient SUVs will be purchased).
Sadly, investors themselves have very little say in decisions of the corporation they partially own. Factory workers who have invested part of their income for 30 years have essentially no say if the corporation decides to move, lay them off, or move the job to a low-wage worker overseas. The Business Roundtable released a statement in 2019 from 181 of their member CEOs saying that the mission of corporations should no longer be purely increasing shareholder value. Sadly, the statement didn’t come with any force, its just a press release. Meanwhile, the Business Roundtable’s actions have been to decrease shareholders ability to offer resolutions for a vote on items such as improving company’s environmental standards, requiring diversity training, and implementing worker safety standards. The Business Roundtable even sent a letter to the Trump Administration in 2017 advocating that shareholders ability to offer resolutions for a vote be curtailed and has continued to lobby for further restrictions on shareholder-led proposals. The Securities and Exchange Commission (SEC) accepted the Business Roundtable’s suggestions in September 2020, voting to further limit the influence of shareholders over the companies they own.
Why It’s a Problem
If a corporation’s sole goal is to make a profit, then societal goals are at best secondary. It has to follow that if a corporation’s management is charged with only making a profit then they have to think of ways that they can get away with exploiting the environment, workers, or even laws. In America, we have been trained to think over the past 30–40 years that this is perfectly normal. It’s the job of the government to try and create laws that stop corporations from polluting too much, to make sure that workers have safe working environments, that wages and healthcare are provided, and that companies aren’t taking advantage of U.S. intellectual property creation but then moving production overseas. And even the laws that the U.S. does pass are susceptible to the political process, either from constant lobbying to ease up on laws or from political turnover which eases the legal protections passed by the previous lawmakers. A much better system would be to change the goal of corporations so they do not solely focus on earning a return for investors, instead making the goal be the long-term longevity of the business.
Fixing the Problem
Not all countries structure their corporations the same way as in the United States. The U.S. has a two tier system, with company management representing company interests and the board of directors who represent investor interests. But there is a better way, for example France and Germany’s corporate law requires up to half of the board of directors be elected and voted on by the company’s employees. While these two countries are the most notable, dozens of other countries require employees to have representation on the board. This has significant advantages for the home country because they need fewer laws to ensure their companies are good corporate citizens. For instance, in the U.S. there is constant fear of companies uprooting and going to a low-tax country and both political parties pass laws to try to prevent this — but with employee representation on the board this becomes less attractive as it risks moving jobs and resources away from the employees they represent. Further, employee representation gives a voice to the employees to push for proposals that improve worker benefits, safety, and conditions. These are all things that the U.S. government needs to constantly incentivize and force companies into doing but comes naturally to corporations with employee representation. Also, corporations with employee representation don’t typically have as much pay disparity between the executives and average employees. CEOs in France and Germany continue to only make a measly 30 times more than there average employee compared to 300 times more in the United States. Too often boards in the U.S. are made up of executives from other companies that don’t realize the worth of employees, mostly because they don’t do that work.
There are proposals to do this in the United States Congress, with bills being proposed by Senator Warren (S.3215) and Representative Ben Ray Lujan (H.R.6056). While neither of these bills have seen much uptake in Congress they show a willingness by legislators to look at this proposal. A large part of the issue is likely that most members of Congress are unaware of the benefits of a different corporate structure. This proposal could get bipartisan support as it continues to support independent business and it is inherently pro-American by giving American workers greater influence over their business decisions. Additionally, both parties should like this proposal because it allows workers to self-police their workplaces and cut down on the amount of laws and regulations required to enforce safety and worker rights.
I have a number of other writings on how to improve U.S. companies and help workers. I also have a few writings on how to make better long-term financial decisions.
Here are a few I suggest you read: