Tuesday 26 March 2019

More workers on boards news...

Wisconsin Democrat Senator Tammy Baldwin has issued a report calling for workers to elect a third of the board of directors.
The aggregate evidence from comparison countries provides strong support for the theory that worker empowerment can foster several key economic benefits, most notably: higher wages, improved firm performance, increased investment, less offshoring, lower income inequality, and greater socioeconomic opportunity. In order for firms to achieve better performance, workers must have truly board-level representation that allows them to influence corporate decision-making. Research from Larry Fauver and Michael Fuerst, referenced in Exhibit 2, shows that results only become significant once workers have voting representation equal to at least one-third of the board. In other words, simply providing workers a forum to blow off steam will not yield results. Requiring that workers directly elect one-third of corporate boards will ensure that value creators are able to reap the rewards of their labor. Workers invest their time, skill, and effort in the company and depend on managers both to generate a return on that investment and to share that return in the form of increased compensation. Workers also face much higher switching costs than shareholders (the average job hunt is currently over 20 weeks).48 And while shareholders are given the ability to ignore the day-to-day operations of the company, the workers live those operations in their personal as well as their professional lives—workers almost always reside in the community in which their employer operates. Finally, because taxes on wages make up an increasing percentage of federal revenue, workers are also representatives for the interests of taxpayers on corporate boards.
Notably the report is also critical of the "shareholders first" or shareholder primacy model of governance (and banning buybacks is the other big idea Baldwin floats).

Meanwhile, back in the UK, the BEIS committee has issued it's long-awaited report on executive pay. As has been widely reported, the report argues for employee representation on rem comms. And it does so in a way that makes clear that investor oversight of executive pay can only be part of the solution.
It is instructive that whilst there have been many significant displays of dissent on pay reports (which are non-binding) there were only two pay-related resolutions actually defeated in 2018. We welcome the increased attention on executive pay but recognise that much more than engagement will be required to drive a more enlightened and acceptable approach on executive pay
There are a couple of other points I would note. First, this on directors' duties:
We recommend that the new regulator monitors how remuneration reports and better reporting against section 172 of the Companies Act meet the aims of increased transparency and alignment of pay with objectives.
And secondly, the report talks repeatedly about tying executive and employee pay more closely together, and expanding profit-sharing schemes to achieve this.

So, worker representation, a renewed focus on directors' duties and a greater emphasis on profit sharing. That reminds me of something...

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