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Companies should be run by employees, and the EU should encourage new forms of cooperate governance

Updated: Mar 7, 2019

The EU should encourage new forms of cooperate governance. This can take on many forms: from self-organising teams to companies with two chambers for labour and capital, to the old idea of cooperatives, where workers also own the company.

Lisa Herzog argues that capitalist firms exercise a form of “private government” upon their employees. But with new communication technologies, new, horizontal forms of governing work become possible, reducing the tension between efficiency and participatory decision-making. Why not take the opportunity to strengthen employee rights to have a stronger say in company governance?

In future workplaces, robots and algorithms will play an ever-increasing role. Whether this is a good or a bad thing for working people is not quite clear. Will we all work with low pay and bad conditions like the employees in Amazon warehouses? Or like those trying to earn some money by “clickwork” on online platforms? Will workers be mere “appendages to the machine”, as Marx feared, having their working conditions dictated by the owners of the machines? Or can we hope for a more optimistic vision to come true, with workers using robots and algorithms as useful new tools to handle routine tasks, thus freeing their minds for more humane and socially productive work? The outcome will, to a large degree, depend on who will have the say about how work is organised. This, in turn, depends on how companies will be run – in a hierarchical, profit-oriented way or in a democratic, participatory way.

Digital transformation is changing the world of work dramatically. This change presents a historic opportunity to expand the control workers have over the way their work is organised. In capitalist firms, control lies with the owners or with managers acting on their behalf. Workers trade their right to have a say for their wages. This is, effectively, a form of “private government”, as Elizabeth Anderson has argued. However, in many European countries, and especially in the German system of co-determination, workers have more expansive rights: Worker representatives sit on the boards of publicly traded companies, and employees in all but very small firms have the right to form a works council. It must be informed about and heard on all matters, and it needs to approve decisions concerning working conditions, including working hours. This helps to ensure that firms comply with laws protecting workers, such as regulations on working hours.

Co-determination does not make firms fully democratic, as the side of capital still has the upper hand. Such firms, however, are more democratic than, for example, the corporate model that prevails in the Anglosphere. According to standard economic theory, such semi-democratic firms cannot exist as they would be outcompeted by purely capitalist firms. But exist they do, and they compete successfully in the globalised economy. What also exists are numerous cooperatives, that is, firms that are democratically run because the workers are joint owners. Co-ops for agriculture, food, and banking are standard in many European countries. Some, like Mondragon in northern Spain, run businesses over a whole range of industries. To be sure, democratic companies are no panacea for all social ills. But they do give more weight to the rights of workers – which might make all the difference in terms of how we deal with the challenges presented by new technologies.

Risks and opportunities of the digital transformation

The digital transformation gives new urgency to the old conflict between capital and labour, as it undermines hard-won workers’ rights. This, in turn, forces us to rethink the power relations that prevail in our economic systems. The digital transformation, however, is not only a threat, but also an opportunity. With new communication technologies, new, horizontal forms of governing work become possible, reducing the tension between efficiency and participatory decision-making. Such technologies are already used in many companies, but – alas – the power structures remain the same. Why not seize the opportunity to strengthen employees’ rights to have a stronger say in company governance? This can assume many new forms, from self-organising teams to companies with two chambers for “labour” and capital”, as recently suggested by Isabelle Ferreras, while the old idea of the cooperative is experiencing a revival in the movement of “platform cooperativism”. “Platform cooperativism” applies the principle of cooperatives – that workers are also owners – to online platforms that bring supply and demand together, for example, platforms for taxi services. Instead of paying horrendous fees to the corporate owners of platforms and apps, the drivers run the platforms themselves. We need to understand better how such companies can be successful, which models work for which industries, and how digital technologies can support democratic decision-making.

Expanding democracy to the workplace means expanding a principle we accept in the political realm to the economic realm: Those who hold power should be held accountable to those over whom they exercise it. This argument is contested by those who think that workers can simply exit work relations and “vote with their feet”, so they need not be given any voting rights. But this assumption is unrealistic for most employees. Finding a new job is always costly, both literally and metaphorically. Employees need to invest in the skills and the social networks required for fulfilling a specific role in a specific company; they lose at least part of this investment if they change jobs. The ones who can easily “vote with their feet” in capitalist societies are investors, especially investors in publicly traded companies, as they can simply sell their shares. And, yet, they enjoy voting rights derived from their contribution of capital. However, those who contribute labour to a company’s success should have the same rights.

Why workplace democracy is a concern for the EU Why is democratic economic governance an issue for the EU? In a traditionally capitalist environment, employee-run firms are usually at a competitive disadvantage due to path dependencies and critical mass issues. Moreover, potential customers, creditors, and even employees may view them with suspicion. Here, the EU could play a crucial role by allowing and encouraging member states to offer tax incentives to employee-run firms. It could also provide seed funding for firms experimenting with new, employee-centred structures of work governance. Furthermore, it could create a platform for sharing best practices and learning more about how employee-run companies can be successful. These steps could help create a critical mass of employee-run companies. This, in turn, might prepare the ground for EU-wide legislation making democratic governance mandatory for all firms.

Some objections from the Twelve Stars debate

Proposals to make the world of work more democratic are often met with resistance. Let me address some counter-arguments that came up in the Twelve Stars online debate. One worry is that workers would not have the skills necessary to run companies. This objection usually stems from the misunderstanding that democracy in the workplace should be direct democracy. Direct democracy, though, in which all decisions are taken jointly by the entire electorate, is only feasible for small units. The form of workplace democracy we can realistically hope for is representative democracy. Hence, workers would only need to understand enough to vote for managers with the necessary skills, just as they need to understand political issues sufficiently well in order to vote for political leaders. Admittedly, one can question how well this works within the political system. But, if anything, it should be easier for employees to judge the qualities of different managers – after all, they can watch them “from up close” during working hours. It’s also worth noting that in both political and workplace democracy, tasks that require special expertise can be delegated to committees with the relevant skills.

A second worry concerns the property rights of owners, especially owners of small and new businesses. If enterprising people start a company with their own capital, should they not have full discretion about what to do with it? The basic line of response to this worry is that property rights always come in degrees – and with limits and qualifications. For example, owning a knife doesn’t give you a right to jam it into my chest, and you may be held liable if you leave it lying about and a child hurts herself with it. Similarly, the property rights of company owners are always limited by regulations, for instance, concerning safety. Employee’s rights to a democratic workplace would not abolish, but merely further limit the property rights of owners.

A practical way to address this trade-off would be to only demand workplace democracy for firms with a certain number of employees or only for certain legal types of company, such as publicly traded companies. Limited liability and shareholder ownership mean that the owners of a company do not carry the full economic risk; they might lose the money they have invested, but they are not obliged to cover company debt with their private fortune. The formal owner of the means of production in such cases is the company itself, as a legal person. What matters for democratic governance is how control rights are distributed within this legal person; property rights as such do not offer any reason not to share them with employees.

A related worry is that investors would simply not fund democratic companies, if only because they are prejudiced against them. This may indeed be the case in societies that take purely capitalist companies for the natural state of affairs and simply know nothing else. Europe, however, already has a rich tradition of more democratic economic governance, as shown above. World-leading German companies with co-determination models, such as Siemens and BMW, certainly do find investors. And German Mittelstand companies with works councils are preferred takeover candidates of the most capitalist-minded private equity funds. Moreover, they are often funded by Germany’s local Volksbanken, which are themselves cooperatives. We are currently experiencing a phase of record low-interest rates, so bank loans can be a realistic alternative to finding stock market investors. And given that good investment opportunities are rare and that there is growing interest in “sustainable” investment, there is simply no reason for thinking that democratic companies would not find investors.

The concerns about investors – and also, indirectly, the concerns about property – are based on the assumption that democratic firms will be less efficient than firms run in a top-down way. Yet, countless democratic or semi-democratic companies not only survive, but also thrive in competitive global markets. Democratisation clearly has some negative effects on efficiency, as the democratic processes of deliberation and voting consume time and energy (though online tools can help here).

The increased attention to workers’ rights that democratisation is likely to bring about might reduce

a company’s profit. But note that this is an “inefficiency” only in terms of monetary outcomes. Yet, there are also positive effects – and not only in non-monetary terms. Employees might be more motivated and less prone to sabotage and “time theft” if they consider the company a shared endeavour in which they have a stake. It is also likely that the feedback mechanisms between employees and management will function better within democratic companies – not least because company leaders who do not have the company’s long-term interests in mind can be voted out of office. The net effect of these costs and gains on a firm’s balance sheet will depend a lot on the concrete context and the industry in question, and is hard to estimate. The undeniable long-term success of many semi-democratic European companies, however, is most plausibly explained as occurring not despite, but at least partly because of how they are governed.

One participant in the online debate raised the concern that democratic firms are less innovative, as workers are more averse to risking their jobs should an innovation fails. I doubt that this is always true, but let us assume for the sake of argument that it is. In this case, some industries in which innovation is key, such as manufacturing, might be less suitable for workplace democracy – or, rather, they would have to pay a price for democracy in terms of innovative strength. But not all industries, such as service industries, face the pressure of innovation in the same way. My proposal entails EU funding of experimentation in order to better understand the dynamics of workplace democracy and to determine what works best in which industry.

A final worry from the online debate does not question the possibility of democratic firms and accepts that they can have many advantages, but objects to the idea that states, or the EU, should do anything about it. If people want democratic enterprises, they can start them, can’t they? My answer is that the current legal and social frameworks in capitalist societies are not neutral, but favour undemocratic economic governance, not least because of path dependency. Economic systems, however, do not fall from the sky. By setting the rules of the game, democratic societies can shape economic practices in ways that are aligned with their values. We do so with regard to environmental issues and a host of other things. My suggestion is that workplace democracy is as much a desirable aim for a democratic society as a healthy environment is, and that measures – voluntary to start with, maybe mandatory later on – that support more democratic firms should be taken in ways similar to those we have made to support cleaner industries. The EU has created a single market for companies; it should now take steps to help employees run these companies.

Online Debate

On 25 May 2018, Lisa Herzog defended her proposal in the Twelve Stars debate. The main objections are presented below. Rebuttals can be followed in the online debate.

Background Research

Read up on current initiatives and proposals concerning this topic in our Background briefing.


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