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Democracy: where governance of firms may be heading

Datum:23 juni 2020
Auteur:Fabian Ahrens
Democracy: where governance of firms may be heading
Democracy: where governance of firms may be heading

The corona crisis with its restrictions to our everyday lives is not over yet. Not just our social lives were hit hard, businesses and governments around the globe also operate in crisis mode to survive – and with them many of our jobs are in danger. Just as after the last several man-made crises, our collective aim should be to reflect and to use this disruption as a positive stimulus to improve what we think does not work at its best capacity: democracy in our organizations.

Most organizations are governed by top management teams who aim to prepare for the future. Additionally, boards of directors support the top managers by giving strategic advice and monitoring their strategy. Over the decades, the governance of firms by managers and directors has moved from separation of ownership and control to strong investor influence and is currently dominated by a shareholder and stakeholder focus [1]. While this development has strengthened employee rights and wealth, employee’s voices are still mostly unheard when it comes to organizational top decisions – even in countries with strong employee representation such as The Netherlands, Germany, and Scandinavian countries.

A recent call for change by more than 3000 researchers from around the globe was published in 43 publications from 36 countries and in 27 languages. The initiators Isabelle Ferraras, Dominique Méda, and Julie Battilana and their co-signers point to three urgent challenges for societies and organizations: Democratization of firms, decommodification of work, and remediation of the environment [2]. By democratizing organizations, those who invest their time, sacrifice their health and sometimes their lives during crises like the current corona crisis are granted a voice and say in decisions. This is not limited to essential workers but extends to all employees who invest considerable time to pursue their organizations’ goals.

The problematic lack of democracy in companies does not stop at employee representation in strategy matters but becomes more evident for matters of citizenship rights and public policy. I want to highlight two recent examples for the importance of democracy in firms. First, the corona crisis amplified structural problems in the US by showing that unemployment can go from all time best to all time low in just a matter of weeks. As of June, almost 50 million Americans lost their jobs due to the crisis – and with their jobs, they also lost health insurance. Second, in Germany, a country which suffered less economically from the crisis than others, a debate on economic stimulus packages erupted in past weeks. And with it lobby representatives calling for a second “Abwrackprämie” (engl. car scrapping bonus) irrespective of energy efficiency of cars that would mainly benefit the automotive industry and their suppliers. Fortunately, Germany’s government decided against that and held itself accountable for earlier promises to support the European Green Deal [4]. Deciding for the “Abwrackprämie” would have mainly benefitted automotive companies, their shareholders and employees but neglected the larger societal goal of sustainability and focused only on a certain industry to alleviate from the crisis.

That companies try to influence public policy is not wrong per se, but not all decisions that companies’ top deciders lobby for may be in the full interest of their employees or the general public. Changing the governance of companies will be a slow process which needs both bottom-up and top-down support to happen. Governance has changed previously and it will change again but this time it is for the stakeholders without specific shareholder interests such as employees, the society, and environmental ambassadors to take charge, because democratic corporate governance should matter to us all and not be decided exclusively by a few in the corporate elite.

Fabian Ahrens (f.k.ahrens rug.nl) is a PhD candidate at the Department of Human Resource Management and Organizational Behavior. He works with Prof. Dr. Floor Rink, Dr. Dennis Veltrop, and Dr. Laetitia Mulder in the field of behavioral corporate governance with a focus on board of directors and top management team decision making and behavioral processes.

References:

[1] Scherer, A. G., Baumann-Pauly, D., & Schneider, A. (2013). Democratizing corporate governance: Compensating for the democratic deficit of corporate political activity and corporate citizenship. Business & Society, 52(3), 473-514.

[2] Ferreras, Méda, & Battilana (2020): Work: Democratize, Decommodify, Remediate. https://democratizingwork.org/

[3] Marsh & Bischof (2012): 'Hire and fire' has destroyed Britain's jobs economy. https://www.theguardian.com/commentisfree/2012/jan/26/hire-and-fire-destroyed-uk-jobs

[4] European Commission (2019): A European Green Deal: Striving to be the first climate-neutral continent. https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en