Talking Points

The Opportunity Senator Warren Missed

By David Ellerman
University of California, Riverside

Senator Elizabeth Warren’s recently introduced Accountable Capitalism Act is an American version of the German system of codetermination with respect to employees. It also includes a broader buzz about stakeholders and benefit corporations that would amount to little more than a hard-to-enforce new mission statement for big companies. Still, discussion of the proposal may raise a new set of workplace issues that are now largely lacking from public discourse.

But there’s more opportunity here than Warren seems to recognize.

German codetermination was installed by the Allied occupation after WWII as part of the denazification of ownership in the coal and steel industry. Its purpose was to give not just “labor” but the labor unions a seat at the table to discourage any communist tendencies. The relatively strong law of 1951 for the coal and steel industries was later extended in a much less significant form to other large companies. The net effect over the years seems to have been mild.

David Ellerman

Senator Warren’s call for up to 40% employee representation on a company’s board is not directly comparable to the German case. German companies have a two-board system, and the minority employee representation spelled out in the law applies only to the Supervisory Board, which is largely concerned with personnel and social issues. As for the economic issues controlled by the Management Board, labor has at most a single seat, more for informational purposes. The application of codetermination to the larger German companies outside of coal and steel had no specific connection to labor unions (unlike the original 1951 law); it was based on a much older idea in German history of the “working community” of the enterprise.

In neither the original 1951 law nor in its later counterparts did German codetermination include an employee ownership component. Ownership was and is considered the sole province of the German employers.

In the United States, major corporations are far from being a conquered power; they are more like a conquering power. So I would be most surprised if the bill’s proposal of 40% board seats for employees went anywhere—although corporate managers might like the idea of being accountable in theory to everyone (“stakeholders”) and not to anyone in particular (i.e., shareholders).

Unlike in Germany, the idea that a company’s workforce is part of a “working community” is neither a prominent part of American culture nor a part of the Anglo-American system of corporate governance. Indeed, the Warren Act introduces employees as only one among several varieties of stakeholders—people who are affected by the company, like consumers or local community residents—instead of the people who are the company as an organization. The American narrative has been much more centered around the notion of ownership.

Like the codetermination laws in Germany, however, the Warren Act ignores the issue of employee ownership. In particular, it ignores the whole ESOP movement, instead of using that movement’s broad support in Congress to push for some kind of mandatory non-trivial ESOP in public companies of a certain size. With share ownership widely dispersed, even a relatively small-percent ESOP could be quite significant in terms of its effect on employee wealth and clout for one or more board seats.

ESOPs have been quite successful in conversions of small and medium-size family companies. Hence, the question might be how to legislatively sponsor a similar movement for large public companies—instead of trying to legislate a major change in US corporate governance that is independent of ownership and has little basis in American culture or history.

One angle is to connect, as the Warren Act does, to the scandal of companies using share buybacks to manipulate share prices to get management’s stock options in the money. Such direct share buybacks could be outlawed, and companies could instead be required to go through a mandatory ESOP. That is, instead of $X being used to buy back shares out of post-tax income, the same amount would be contributed to the ESOP as a deductible expense. The ESOP would then use it to buy $X of shares off the market and credit them to employee share accounts instead of retiring them to the company treasury.

Another approach would just be to require public companies of certain size to commit to guarantee a series of ESOP loans and pay them off as usual through the ESOP, so that the ESOP would have a certain percent ownership within some given number of years.

These and other ways of getting employee board seats and concomitant employee ownership in large public companies would garner support from both sides of the aisle, and would stand a much better chance than Warren’s current proposal of actually changing American corporate governance.