Co-determination takes the spotlight in the US

By Steven Hill, Hans Böckler Stiftung, February 12, 2019

German-style codetermination gains ground in the US, pushed forward by presidential candidate Senator Elizabeth Warren. Will Trump’s America take a page from Europe’s “social capitalism”?

Over the past year in the United States, German-style codetermination has moved closer to center stage in the national debate over inequality and worker’s rights. Several high profile Democratic Party leaders, including 2020 presidential candidate US Senator Elizabeth Warren, have proposed partially worker-elected boards of directors for major corporations. This proposal is gaining attention not only as a response to the right-wing populism of President Donald Trump, but also as the US tries to cope with the long-term decline of trade unions and worker’s rights. The ongoing rise of the digital economy, launched by dominant tech platform companies from Silicon Valley and Seattle, has only made these pressures more acute.

Senator Warren’s bill, which is called the Accountable Capitalism Act (Senate Bill 3348), aims to not only introduce codetermination to the US, but more broadly to transform the skewed market incentives of “shareholder capitalism” that push companies to invest far more in maximizing shareholder value than in their workforces and communities. The legislation seeks to reverse the trends over the last thirty years that have led to record corporate profits and rising worker productivity but stagnant wages and declining labor power. The US, says Sen. Warren, should “return to the era when American corporations and American workers did well together.

Some Americans learning from „Social Europe“… and US history

The statements of Sen. Warren and other Democrats about the rationale for her bill sounds similar to the defenses of “Social Europe” by leading German and European politicians. “For most of our country’s history,” says Sen. Warren, “American corporations balanced their responsibilities to all of their stakeholders — employees, customers and communities in addition to shareholders — in corporate decisions. And it worked: profits went up, productivity went up, wages went up, and America built a thriving middle class.” Starting in the 1930s, the four decades dominated by the New Deal philosophy of public-private partnership and government intervention to ensure a broadly shared prosperity often have been cited by US progressives as a golden age that is disappearing into the mist.

But in the 1970s a new idea began to take hold in the US, particularly among business and political elites, that undermined the New Deal. That idea was that American corporations should focus only on maximizing returns to their shareholders, and ignore as much as possible any other company stakeholders. A main proponent of this view was influential neo-liberal economist Milton Friedman, who wrote an era-defining New York Times magazine article in 1970 entitled “The Social Responsibility of Business Is to Increase its Profits.” For the past several decades, that has been the dominant business and political elite philosophy.

Now Sen. Warren is directly challenging that neo-liberal paradigm with her codetermination bill. “For decades, American workers have helped create record corporate profits but have seen their wages hardly budge,” says Sen. Warren. “To fix this problem we need to end the harmful corporate obsession with maximizing shareholder returns at all costs, which has sucked trillions of dollars away from workers and necessary long-term investments.” 

US workers vs. corporate shareholders

The case for US-style codetermination is buttressed by some disturbing factual trends. In the early 1980s, America’s biggest companies dedicated less than half of their profits to shareholders, and reinvested most of their profits in the company and workforce. But over the last decade, those proportions have been turned on their head – today, large American companies dedicate 93% of earnings to shareholders instead of to workers or to long-term reinvestment in the company. Indeed, with the passage of the Trump tax bill in 2017, American companies announced more than half a trillion dollars in stock buybacks in 2018, even as real wages remained flat. That’s nearly a doubling from the early 1980s. The result is that booming corporate profits and rising worker productivity have not led to rising wages, but instead have led to a surging stock market.

Yet the stock market helps relatively few Americans. Fifty percent of all US households own no stock at all, and of those households with stock, most own relatively small amounts. Indeed, the wealthiest top 10% of American households own 84% of all US-held stocks. So this dedication to “maximizing shareholder value” means that the multi-trillion dollar American corporate system is mostly focused on making the richest Americans even richer.

THE WARREN LEGISLATION CALLS FOR 40% OF BOARD MEMBERS TO BE ELECTED BY THAT BUSINESS’ EMPLOYEES.

The Warren legislation ambitiously tries to hit reset on US capitalism in a fundamental way. Some of the specifics of the legislation mirror the structure of Germany’s codetermination, though there are differences as well. The Accountable Capitalism Act would:

  • Change how corporations are chartered in the US. Under current law, businesses apply for a corporate charter from one of various states, not from the federal government. The Warren bill would create a new federal chartering requirement for businesses with more than $1 billion in yearly revenues, to be called a “United States corporation”. Also those businesses’ new federal charters would redefine their corporate mission so that they must consider not just the interest of shareholders but of all corporate stakeholders, including employees, customers, and the communities in which the company operates.
  • Borrow from the successful approach in Germany, Sweden and many European countries, in which workers employed by a business would be empowered to elect a high percentage of the members of that business’ board of directors (similar to the supervisory board of German and European corporations). The Warren legislation calls for 40% of board members to be elected by that business’ employees.
  • Restrict the sale of company shares by the top directors and officers of the corporations. Currently, these executives are compensated mostly with company stock, which gives them huge financial incentives to focus exclusively on shareholder returns. So the bill prohibits directors and officers of the business from selling their own company shares within five years of receiving them, or within three years of a company stock buyback. The hope is that this requirement would ensure that corporate decision-makers are focused on the long-term interests of all corporate stakeholders, rather than on enriching themselves on the basis of short-term gains in their companies’ manipulable share prices.

The bill also permits the federal government to revoke the charter of a corporation if the company has engaged in repeated and egregious illegal conduct, and has failed to take meaningful steps to address these problems. But before actual revocation, the company in question would be allowed one year to clean up its act.

THE WARREN BILL FOR CODETERMINATION HAS FOUND FAVOR FROM MANY DIFFERENT POLITICAL SECTORS

Previous to the Warren bill, in March 2018 two other Democratic US Senators, Tammy Baldwin and Brian Schatz, introduced their Reward Work Act (Senate Bill 2605 and House Bill 6096). If passed, that legislation would require every listed US company to allow its employees to elect one-third of the board of directors (and like Warren’s bill, also would ban unjustified stock buy-backs). Baldwin put forth her bill and yet easily won re-election eight months later, showing that promoting economic democracy did not hurt her political career, and may have even enhanced it. Since she is representing Wisconsin, a politically moderate state, this has been seen by some Democrats as a sign that a progressive economic agenda which incorporates worker-focused legislation like codetermination, has a political future in the US.

Indeed, the Warren bill for codetermination has found favor from many different political sectors, including from a number of noted academic and policy institute leaders. Dr. Robert Frank, Professor of Business Management from Cornell University and Jeffrey Madrick, a director at the Century Foundation, have joined a dozen others in writing that “Germany has a similar requirement for large corporations and has seen robust economic growth and wage improvements for decades.” An article in the Michigan Business and Entrepreneurial Law Review entitled “Co-determination in Germany: A Model for the U.S.?” also made clear the Warren bill’s antecedents.

US conservatives attack co-determination

Not surprisingly however, critics on the conservative right went ballistic. The National Review’s Kevin Williamson called it a “batty” plan to “nationalize every major business in the United States,” which would be “the largest seizure of private property in human history.” Scott Shackford of Reason called it “Elizabeth Warren’s plan to destroy capitalism” because it requires corporations to respect “a set of values above just profits” and makes them “legally answerable to people other than their shareholders.” This, he says, makes it “socialism.”

Some critics on the left also have weighed in. Columnist Kevin Drum from Mother Jones wrote “Why choose an oddball proposal that sounds European and vaguely socialist? Why not instead propose a truly simple and powerful proposal to boost unionization throughout the American economy? If your goal is to increase the power of the working class, this is the way to do it.” But Drum’s question is misplaced, because unlike German co-determination, which also mandates more democracy at the shop floor level (betriebsrat), Warren’s legislation only addresses the board of directors of a corporation. Unions will still be the primary agents in each workplace (though the level of unionization in the US private sector has shrunk to an alarming 6.5% of those workers). Besides, proponents have fired back, why not do both? Having stronger unions and codetermination could be different sides of the same coin. Again Germany, along with places like Austria, Denmark and Sweden, are examples of places where stronger unions and codetermination have been complementary.

Some critics have wondered why Warren’s bill only covers companies with a billion dollars or more in revenue, rather than firms with a designated number of employees. For example, the German Codetermination Act mandates that any employer with 2000 or more workers must have 50% of supervisory board members elected by the employees (and in companies with 500 to 2000 employees, the workers must elect one-third of the board members). But Warren’s bill is meant to ensure that capital-heavy yet employee-light Silicon Valley firms are included. As the digital technologies continue to develop, these companies are using software and algorithms to replace workers. So in the future using a threshold involving the number of employees may backfire. But again, why not do both? It would be better to use thresholds pegged to either an employee head count or company revenue.

GERMANY’S EXAMPLE ALREADY HAS BEEN A HUGE HELP IN RAISING THE CREDIBILITY OF THIS PROPOSAL

Sen. Warren and proponents understand that her legislation is not going to become law anytime soon. A hostile president and Republican-controlled Senate are mighty barriers to its enactment. But Sen. Warren (as well as Sen. Baldwin before her) is clearly planting some seeds, trying to stir up debate and give grassroots activists something hopeful to get excited about. Some are speculating that Warren is doing this in preparation for her announced presidential run in 2020. Proponents realize that most Americans, whether left, middle or right, are still mostly unfamiliar with codetermination. It will take some time for advocates to educate about these changes to corporate governance.

As part of this educational process, Germany’s example already has been a huge help in raising the credibility of this proposal. Studies from Germany’s experience with co-determination indicate that it leads to less short-termism in corporate decision-making and much higher levels of pay equality, while other studies demonstrate positive results on productivity and innovation. The American Prospect’s Harold Meyerson wrote, in support of Warren’s legislation, “Co-determination has been a major factor in Germany’s ability to maintain world leadership in manufacturing, preserve its middle class, and limit CEO pay – a whole raft of achievements that have eluded the financialized United States.”

America’s long-ago history using co-determination

The educational effort will be helped along by one other factor. No doubt many Americans will be comforted when they find out that co-determination is not really all that “foreign” of an idea. In fact, in many ways it is as American as apple pie.

In 1918, the gargantuan Standard Oil of New Jersey, inheritor of the legacy of oil baron John D. Rockefeller, made a dramatic shift in its model of corporate governance. Led by its then-president Walter Teagle, it instituted a form of a partially worker-elected board of directors to give its employees “a voice in the fixing of their compensation, hours of labor, conditions under which they work and live, and everything affecting the welfare of themselves and their families” (from company literature). The plan was for “representatives to be chosen by the workmen to represent them at the company’s councils and every man employed will have a vote.” Spurred on by attempts to blunt the growing power of labor unions, this structure became part of a wave of corporate governance changes, with other large corporations such as Goodyear, United States Rubber, International Harvester and others adopting forms of co-determination.

FOR MANY AMERICANS WARREN’S BILL IS BOTH A RELIEF AND A BEACON POINTING THE WAY FORWARD.

This legacy of worker representation did not survive in the US, mostly because labor unions during the time of the New Deal chose to settle for a bigger piece of the economic pie for their members, enforced via workplace (not sectoral) collective bargaining agreements with individual employers, instead of pushing for any type of codetermination rights. But it took root in Germany in the post World War II era and spread to Sweden, France and other European countries. In fact, the evidence suggests that the Allied Forces, as the victorious conquerors of Western Germany, imposed this structure on German companies as a way of breaking up the power of the industrialists who had supported the Nazis. In effect, one might say, Germany was “punished” with a degree of economic democracy that US leaders have never bestowed upon US workers.

Co-determination has become a foundation of European-style “social capitalism,” which has proven to be more effective at enacting a more broadly shared prosperity than US-style Wall Street/Silicon Valley capitalism or Chinese-style state command capitalism. And Americans today are showing an increasing degree of interest and even acceptance. An April 2018 opinion survey found that, once they become familiar with codetermination, a majority of American respondents support the concept, favoring it by a margin of well over 2:1 (53% vs. 22%, though with some respondents undecided).

 For many decades, Germany’s leadership in enacting new forms of worker representation and empowerment has provided an innovative model for corporate governance. As the world slides uneasily into its digital future, codetermination will increasingly be seen as an effective way to maintain both a broadly shared prosperity and the crucial voice of workers in the economy. For many Americans chafing under the surreal landscape of TrumpLand, Sen. Elizabeth Warren’s bill for German-style codetermination is both a relief and a beacon pointing the way forward.

For more information about codetermination in the US context, visit Codetermination Facts at https://codeterminationfacts.com/