The right way to give workers more control

Theresa May says that she wants to put workers’ representatives on company boards, in the German style. 

That would be a bad idea: it perverts the board’s incentives to make the company as profitable and efficient as possible, and creates unnecessary divisions at the top of the firm, where unity of vision and purpose are very valuable. 

Giving unions more power – for it is they who will be representing the workers – is also not necessarily a good idea. One study suggests that this rule has cost German firms 26% of shareholder value, which is very large.

How then to give workers more say in how their firms are run? One way might be to give workers shares in their firms. That way they benefit when the firm is well-run and valuable, and they will have a voice at shareholder meetings. The board will serve them (as well as other shareholders), but will still function normally as a board.

Workers who have been at the firm for more than six months, on a permanent contract, could be given equivalent to 5% of their salary in shares in the firm. If they want to sell those shares, so be it, but if they value having a long-term stake in their firm and say over how it is run, they will not.

Who pays? It depends on how rapidly such a system was introduced. If it was done immediately through the creation of new shares it would, effectively, be a tax on existing shareholders. This would be a bad idea – it would effectively be a tax on investment, which depresses growth. 

Better would be to phase such a system in over a number of years so that as new contracts and wages were negotiated this would gradually take effect. This would mean that it would probably be the employees themselves paying, though if it’s true that wages are sticky upwards as well as downwards (so workers don’t get wage rises when they should) it could lead to some being better off.

The one problem with this would be minimum wage workers – requiring that they also be given 5% of their salary in shares could make the cost of employing some of them prohibitively high, causing unemployment. To avoid this, only workers earning 60% of the median wage or more should be included in this scheme.

I’m not entirely convinced that workers having more say in how their firms are run is worthwhile. Really this feels like a solution in search of a problem. But if Theresa May thinks it’s important, so be it. If she is going to give workers more say in how their firms are run, she can at least try to do it properly.