Foto: Leo Reynolds
It is now time to consider seriously the extension of democracy beyond state institutions. And this implies at the very least a careful examination of whether disenfranchised groups in firms, churches or political parties have not been excluded for reasons that are totally inconclusive.
Democracy is an old and complex idea. And it is fortunately a reality in all Western European countries, including Latvia. Consider one of the features of a democracy: the extension of its franchise. Black people, women, people who would not own land are examples of categories that used to be excluded from the right to vote. And after the restoration of independence, all Latvian citizens who reached the age of 18 are entitled to vote and elect the members of the Saeima. The fact that the franchise is more extensive than it used to be is clearly a progress. Of course, an appropriately extensive franchise is not enough for a democracy to flourish. One also needs deliberation, participation, separation of powers, as well as minority rights, freedom of expression, etc. Yet, while not being sufficient, an appropriately extensive franchise is a necessary requirement for any democracy.[1]
Consider now for a moment another key actor in our societies: listed firms. What do we observe in the vast majority of such firms listed on the stock market? The right to vote is restricted to shareholders only. Those who bring in human capital as opposed to financial capital may well be consulted. Yet, they don’t have a right to vote in the general assembly. This can be referred to as shareholder primacy: those who own shares and only them are entitled to take part in votes at the general assembly in order to appoint the board of directors.[2]
For many of us, the fact that non-state institutions such as political parties, religious organizations or firms, internally disenfranchise significant groups of people is not seen as problematic. The issue is not at all on the political agenda. This is even less so in former communist countries where granting more rights to workers may be too easily confused with transforming private firms again into state-owned ones. Yet, many people ask themselves why we should accept that shareholders pressure boards of directors for share prices that are way above the average growth of the economy. My suspicion is that if we modify the institutions within firms, we may leave a little bit less room to shareholders, which could possibly reduce a the pressure towards excessive returns to shareholders.
Empowering workers as workers
Before considering the main arguments, it is crucial to realize that what will be referred to here as a democratic firm is simply a firm that enfranchises not only shareholders but also workers. This entails that I will call neither for the disenfranchisement of shareholders, nor for bringing private firms back within the ambit of states, nor for the enfranchisement of categories of stakeholders other than shareholders and workers (such as clients, neighbours,..).
Moreover, it is crucial to understand that the enfranchisement of workers can take two forms. One consists in saying: « If you want to grant the right to vote to workers, you should simply give them shares and allow them to vote as shareholders ». This is the case with production cooperatives (such as Mondragon) or with Employee Stock Ownership Plans (ESOP’s). The other avenue consists in granting the right to vote to workers qua workers. And the system that comes close to that is for example the German co-determination system. Enfranchising workers qua shareholders or qua workers are of course two different strategies, involving very different implications. For reasons that would be too long to explain here, let us assume here that we should go for the second branch of the alternative.
The form that such a democratic firm could take in practice consists — along the lines of the co-determination system – in organizing it in two constituencies: workers and shareholders. Each constituency then appoints the same number of members in the board of directors who would in turn appoint an arbitrator member in case of disagreements. Hence, the only difference with a listed firm today would have to do with who appoints the board of directors. Call this a paritarian model.
Assessing the property argument
When first presented with the idea, many people are very reluctant and will tend to invoke all sorts of arguments against it, such as the exit argument, the goal argument, the residual claimant argument, etc. It is impossible to deal with each and every of them here. Let me consider just one of them: the property argument. It goes roughly along the following lines: « shareholders own the firm and this is why they should be entitled to decide alone about how the firm should be run ». In order to defend such a claim, we would need to find convincing answers to the following three questions:
(1) What does « owning a firm » mean?
(2) If we know what « owning a firm » means, does it follow that it is only those who own the shares that should be said to own the firm?
(3) Even if we were to agree that it is the shareholders who own the firm, does it follow that they should be the only ones to be in power in firms?
Here, let us assume for the sake of argument that the right answer to the two first questions has been established: we know what « owning the firm « means and we assume that shareholders are those (and the only ones) who own the firm. Now, does the disenfranchisement of workers follow? I will argue that it does not.
Why not? Consider for a moment an old debate in which the famous « Founding Fathers » have been involved in the late 18th, early 19th century. At that time, they were debating, in the case of States, on what was referred to as the « property requirement for voting ». In short, in order to be entitled to vote, you had to own land. If this institution were to be re-introduced today in Latvia, most of us would find it totally unacceptable. Yet, it does exist… in firms. If we consider for a moment that restricting the right to vote in states to those who own land is not so different from restricting the right to vote to those who own shares in a firm, we can try and use the resources of that old debate to understand what the possible reasons behind this link between property and power could be.
Lessons from the Founding Fathers
This late 18th-early 19th century debate gave rise several arguments trying to establish a link between land property and exclusive power. Let us look at four of them.[3] The first argument, used e.g. by John Adams in a 1776 letter to James Sullivan, consisted in asking: « Is it not […] true that [those] who are wholly destitute of property, are also too little acquainted with public affaires to form a right judgment […] »?[4] Such an argument from competence is of course also invoked by those who oppose firm democratization. They claim that workers would not be competent enough.
Such a concern for competence is of course not out of place, as the disenfranchisement of children in most democratic states suggests. However, two facts should be taken seriously into account. First, except when it comes to children, the usual answer of democracies to the challenge of competence consists in funding education as well as appointing representatives rather than relying on direct democracy. And the paritarian model also endorses this idea of representative democracy. Second, it is not plausible to claim that shareholders, especially small amateur ones, would be so massively more competent than workers who spend a third of their time at least in firms.
The second type of argument does not connect competence with property. Instead, it connects the latter with the degree to which people care about their country. Thomas Jefferson in a 1776 letter to William Pendleton defended the idea that all those who have a permanent intention of living in the country should have the right to vote. And he took « having property » as one of the possible sources of evidence to ascertain the existence such an intention. His idea was that « whoever intends to live in a country must wish the country well and has a natural right of assisting in the preservation of it ».[5]
If we transpose this to firms, there is a clear parallel with those who compare the degree to which shareholders and workers tend to adopt a long-term horizon. I think that critiques of workplace democracy are too quick to assume that workers would necessarily adopt a short-term horizon whereas shareholders would be characterized by a much more significant degree of long-termism. Perhaps the nature of their assets invites such a conclusion. Yet, once we consider the amount of time that shareholders tend to keep their shares before selling them, we may doubt about the idea of a significantly larger degree of long-termism of shareholders on average.[6]
A third interesting argument has to do with the need for voters to be able to express what they think in an independent manner. This concern was expressed e.g. by Alexander Hamilton in 1775: « If it were probable that every man would give his vote freely, and without influence of any kind, then, upon the true theory and genuine principles of liberty, every member of the community , however poor, should have a vote… ».[7] Those who didn’t own land were dependent on those who did. And this was seen as a reason for excluding the former from the franchise, since they could not express what they truly thought anyway. Again, there is a much better solution to this than disenfranchisement. It is called secret vote and is widely practiced in democratic states, including the otherwise most transparent ones. And when it comes to workers who apply to be representatives, many labour law regimes today have devised special systems to protect trade unionists. Such regimes could be extended to workplace democracy representatives at large.
Finally, there is a fourth argument that James Madison insisted upon in 1821.[8] He was not arguing for granting exclusive power to landowners. He was proposing instead a bicameral system such that landowners would in fact have twice as much power as non-land owners. Members of one legislative branch would be elected by all citizens (including landowners) whereas members of the other one would be appointed by landowners only. One of the justifications of this bicameral model had to do with the fear that one group would systematically outnumber the other.[9] Bicameralism could then be seen as a form of minority right protection aiming at preserving the interests of both categories.
Transposed into firms, a paritarian model would allow us to disregard the problem of making the number of shares commensurable with the number of hours worked to determine the voting weight of each group (workers and shareholders). And it would prevent that firms that are capital-intensive and others that are rather labour-intensive would lead to the systematic domination of – respectively – shareholders or workers. Understood in that sense, the paritarian model is not only about enfranchising workers. It is also about making sure that neither the interests of workers, nor those of shareholders could systematically dominate in a firm. Interestingly enough, what was then an argument to defend the extra weight to be given to landowners can be transformed into an argument for « minority protection » within the firm, once we accept the view that workers should also be enfranchised.
Such references to an old debate do not provide us of course with a comprehensive and definitive argument. They invite us however to consider the fact that the property requirement for voting in states was at that time defended on grounds that are quite similar to some of those we use nowadays to oppose the democratization of firms. We have experienced in state democracies the extension of the franchise. It is now time to consider seriously the extension of democracy beyond state institutions. And this implies at the very least a careful examination of whether disenfranchised groups in firms, churches or political parties have not been excluded for reasons that are totally inconclusive.
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[1] Goodin, R., 2007. «Enfranchising All Affected Interests, and Its Alternatives », Philosophy and Public Affairs, 35(1) : 44-68
[2]On shareholder primacy, see e.g. Stout, L., 2002. « Bad and Not-So-Bad Arguments for Shareholder Primacy », Southern California Law Review, vol. 75, available at : http://papers.ssrn.com/sol3/papers.cfm?abstract_id=331464 or Rebérioux. A., 2007. « Does shareholder primacy lead to a decline in managerial accountability ? », Cambridge Journal of Economics, vol. 31 : 507-524
[3] Here, we use material gathered together by Thomas G. West on the companion webpage to chapter 5 of his book (West, 1997) : http://www.vindicatingthefounders.com/
library/index.asp? category=5
[4] http://www.vindicatingthefounders.com/library/index.asp?document=81
[5] http://www.vindicatingthefounders.com/library/index.asp?document=72
[6] See e.g. Hansmann, H., 1996. The Ownership of Enterprise, Cambridge (Mass.)/London (UK): The Belknap Press
[7] http://www.vindicatingthefounders.com/library/index.asp?document=80
[8] http://www.vindicatingthefounders.com/library/index.asp?document=78
[9] See e.g. Mill, J. S., 1991. On Liberty and other Essays, Oxford: OUP, 592 p. (chap. XIII of his Considerations on Representative Government)