Changing the Corporate Form of Organization
By Arnold Kling
Concerning U.S. corporate law, Kent Greenfield writes,
Compare this to the European model of corporate governance, which requires much more robust social obligation on the part of corporations, embodied not only in cultural norms but also in law. The duty to disclose information and consult with employees is much more robust, and many large European companies include labor representatives on their boards. Germany, for instance, requires that half the senior board of large companies be elected by employees rather than shareholders. And at least another 15 European countries have some kind of provision requiring “co-determination,” worker representation on boards of companies headquartered in their national territory.
The entire article is a must-read if you want insights into the progressive mindset. Perhaps our colleagues at libertylawsite will comment.
My reading is that Greenfield is asking why corporations should be controlled by shareholders. Aren’t other stakeholders, including workers, at least as important?
My off-the-cuff answer is that shareholders have to be in control because they are subject to looting in a way that workers are not. A worker who gets the shaft can simply go elsewhere*. Shareholders are in it for the duration, regardless**.
*As a worker, I might invest in a lot of firm-specific human capital, which could make it difficult for me to exit the firm. So in theory I do face some risks of adverse, arbitrary decisions from management. However, I do not need to have a voice in order to protect myself. As long as the firm and I are sharing the rents from this firm-specific human capital (vs. me taking all of them), the firm has an incentive to treat me well.
**As a shareholder, I can sell stock at any time. However, suppose that today the workers vote to loot the company, selling off its assets to pay a huge worker benefit. At that point, I can sell my stock, but it is already going to be worthless, because who will buy it? So, even though I can sell at any time, the value of my shares depends on the long-term value of the company.
If you want to see how the “workers as stakeholders” model turns out, I suggest you look at the public sector in California or the school system in Maryland.