Australian corporate law scholar James McConvill sent along an announcement of his forthcoming book Shareholder Participation And the Corporation: A New Perspective:
By applying recent empirical studies into human happiness McConvill convincingly argues that shareholders, particularly individuals, should be included in the internal governance framework of public corporations, and enjoy a direct participatory role in the corporation if they so choose. Recent studies have consistently shown that active participation is one of a limited number of factors that has a positive correlation with levels of personal happiness, however while disciplines within the social sciences have long considered the implications of these findings legal scholars have failed to grasp their significance.
I respect James' work on corporate governance and I haven't yet had a chance to read his new book, so what follows is tentative, but the precis raises some serious question marks in my mind. Back in the late 1990s, the same sort of happiness-based arguments were being made to support employee involvement in corporate governance. One immediate problem thus is that it is difficult to cabin participation rights granted on the basis of promoting happiness to a single constituency. Indeed, if this is the basis on which participation rights are to be assigned, other corporate constituencies would have a far stronger claim than diversified investors who own stock in many companies and often are active traders. Indeed, if this is the basis on which we allow participation, employees, who generally work for a single firm and often find community and solidarity at work, would have the strongest case for participation.
A second problem is that I just don't buy this happiness research. I examine that literature, as it relates to employee participation in corporate governance, in my article CORPORATE DECISIONMAKING AND THE MORAL RIGHTS OF EMPLOYEES: PARTICIPATORY MANAGEMENT AND NATURAL LAW. In that article I wrote:
Some workers demonstrably prefer hierarchial workplaces in which decisionmaking is reserved to management to workplace democracy. Consider the empirical data on union involvement, which suggests that apathy is common. Only a very low percentage of a union’s members actively participate in its affairs. In his important case study of an early self-directed work team, John Witte contended from such evidence that “there is little reason to suspect that most workers would either endorse participation or become actively involved if the opportunity arose.” To the contrary, Witte posits that workers generally accept hierarchial authority and perceive obedience to authority as an integral part of their job: “for the majority, disobedience is unthinkable.”
Although there is some recent evidence that many American workers desire a greater voice with respect to shop floor issues, such as work content and schedules, there is still both empirical and anecdotal support for Witte’s pessimistic prediction. A recent study of transportation firms found that long-term use of employee involvement initiatives increased stress and decreased employee fulfillment—exactly contrary to the encyclicals’ expectations. A study of “empowered” employees versus a control group of unempowered employees within a single insurance company found no statistical difference between the two groups on such productivity-related issues as motivation or even on some job satisfaction measurements. Only about half of the participants in Witte’s own case study were willing to change jobs in order to get more participation and that rate declined rapidly if doing so would require longer hours or lower pay. In unionized plants, rank and file workers have often resisted collective bargaining agreements that included employee involvement. In firms adopting self-directed work teams, ten to twenty percent of employees will resist the change because they prefer a mundane job to the greater responsibility and higher expectations associated with team membership. Other studies have found even higher rates of resistance: Participation rates in voluntary participatory management programs range from a low of 33% to a high of 68% of the eligible workforce. Conversely, a study of nonparticipating employees found interest in volunteering for employee involvement programs ranged from a low of 15% to a high of 63%. Anecdotal evidence suggests that firms using participatory management techniques are expending considerable effort in selecting employees who are psychologically equipped to work under those conditions, which is precisely what one would expect if some workers are not temperamentally suited for participatory workplaces. The existence of differing tastes among workers is similarly suggested by evidence that workforce demographics are correlated with the effectiveness of participatory management.
Why do such workers prefer hierarchy? Some are simply being economically rational. Behavioral patterns that are learned over many years, and reinforced by past rewards, are exceedingly difficult to change. As such, many firms will experience a path dependent resistance to participatory management. Introduction of participatory management within a firm typically entails substantial change, which will threaten vested interests in the workforce. Self-directed work teams threaten the seniority—and even the jobs—of foremen and other supervisory employees. Surviving supervisors are thrust into new positions as “team consultants” rather than bosses, with new and demanding responsibilities. Gain-sharing, pay for skills, and team-based compensation all threaten traditional seniority-based compensation. Training may be resisted by some workers: the old dogs who don’t want to learn new tricks. The job rotation and stress on “continuous improvement” characteristic of self-directed work teams will threaten those workers who prefer a more mundane set of job responsibilities.
Studies of formalization—the creation of written rules, procedures, and instructions—provide an alternative explanation of the taste for hierarchy. Formalization reduces role conflicts and ambiguity, which increases work satisfaction and reduces feelings of alienation and stress. Employee involvement can trigger role stress because many employees lack the quasi-management skills—agenda building, conflict management, and problem solving—required for successful employee involvement. Alienation can result from the greater workload and negative changes in peer group relationships experienced by some participants in employee involvement. Workers who respond well to formalization are poor candidates for participatory management, and vice-versa. This hypothesis is supported by findings that the success of a participatory management program largely depends on the personality of workers and managers. Workers with weak desires for independence are unaffected by employee involvement, while those with strong independence drives get increased job satisfaction from it. Based on the various studies recounted above, both types of workers appear to be present in the American workplace. Whether the taste for participation or for hierarchy is more common is hard to say from the evidence to date, but at the very least “checkered history of job enrichment efforts has taught us not to assume that everyone wants more autonomy, challenge, and responsibility at work.” …
To be sure, my argument is only that worker tastes are heterogeneous. Some workers do want to participate in corporate decisionmaking. Presumably at least some such workers also develop feelings of alienation when they are denied participation rights. Should not their needs and desires be factored into the public policy equation? But how do we decide which set of preferences to privilege? Implicit in much of the Papal and secular literature in this area is the notion that the desire for participation is some how more authentic and, hence, more worthy of protection. In this regard, much of the literature smacks of the variant of hard determinism asserting that choices made in accordance with a system of belief or values that are socially constructed are unauthentic. Even if one accepts the determinist view, however, why is the choice to participate any more authentic than the choice to refrain from participation? If one is socially constructed and, hence, not authentic, is not the other equally socially constructed?
I find it useful to recast the problem of choosing between competing sets of preferences in economic terms. … Once the heterogeneity of worker tastes is conceded, government-mandated participatory management cannot be defended on Pareto superiority grounds. Those workers who have a taste for hierarchy would be worse off under such a mandate. The case for government mandates thus must be phrased in Kaldor-Hicks terms; i.e., that enough workers with a taste for participation would benefit from compulsory employee involvement to justify imposing it on all. If so, mandatory participatory management would be Kaldor-Hicks efficient, so long as the harm to workers that lose would be off-set by the gains made by winners.
The validity of Kaldor-Hicks efficiency as a guide to public policy is sharply disputed. In particular, important strains of natural law thought are clearly inconsistent with Kaldor-Hicks efficiency. The Lockean strain, for example, precludes the use of others as means to our own ends. The modern strain associated with Catholic thinkers such as Finnis and Germain Grisez likewise proscribes doing evil that good may result. Because the Kaldor-Hicks standard permits uncompensated wealth transfers, it runs afoul of these precepts.
The debate over Kaldor-Hicks efficiency, however, need not detain us further because government-mandated participatory management cannot be justified even under that lenient standard. … it is far from clear that participating in corporate decisionmaking is a particularly useful way of addressing feelings of alienation. Just as participatory management is unlikely to employ the creativity of most workers in large enterprises, it seems equally unlikely to make their jobs less dull. Moreover, there are many other sources of alienation in most work environments over and above the decisionmaking process. Indeed, some jobs are inherently boring and alienating, even under otherwise ideal working conditions.
Participatory workplaces, moreover, can be just as alienating as hierarchial workplaces. As we have seen, this is especially true of workers who prefer hierarchy, but it may in fact be true of all workers. In today’s corporate world, as I have demonstrated elsewhere, participatory management is used not to prevent worker alienation but mainly as a way of tapping workers for information and to prevent shirking. Proponents of the Papal position might dismiss this argument (among others) by conceding that present forms of employee involvement are, in their view, flawed but that some ideal form exists which would be more effective in promoting human development. Such an argument, however, smacks of the “if only people were different” fallacy. Sound public policy must be based on how people actually behave, not how we hope they would behave in some ideal world.
Most of these arguments would seem to apply with equal force to shareholder participation. Given the strong economic case against extensive shareholder participation, as I recently detailed in my UCLA Law Review article The Case for Limited Shareholder Voting Rights, I'm afraid I will be approaching James' new book with some skepticism. Yet, like all his work, I suspect it will nevertheless reward study.
