Reforming capital markets to build broad-based prosperity and reduce economic inequality

Worker directors already sit on the boards of some of the world's largest listed companies. Companies representing 11% of global market capitalisation have employee directors, including SAP, Siemens, Allianz, Novo Nordisk and TotalEnergies. This briefing by Tom Powdrill maps the main models of worker participation, from German supervisory boards to French employee directors on unitary boards and Nordic rights that workers can choose to activate. It finds that participation is far more widespread where workers hold an enforceable right than where boards decide voluntarily. Support for worker participation spans the political spectrum and includes institutional investors such as Railpen, which leads the Workforce Engagement Coalition, and Amundi. Worker directors bring operational knowledge and perspectives that can strengthen board decisions alongside shareholders.

Corporate governance in the US and UK rests on a simple idea: shareholders with money at stake will watch over companies. That idea is under strain. Most institutional capital is now highly diversified and increasingly passive, so the incentive to focus on any single firm is weak. At the same time, policymakers are cutting back the shareholder rights and disclosures that made engagement easier. Tom asks who else has a deep, long-term stake in a company’s success. The answer is its workforce. Workers see the business up close every day. They often spot risks and opportunities before they reach the boardroom. And they can’t spread their jobs across a 3,000-stock index. The logic that justifies equity pay for executives points toward a governance role for workers too. As Tom puts it, today’s system should give ‘voice’ to those less likely to ‘exit’.

Predistribution is an approach to avoiding vast economic inequality from production cycles by ensuring that workers and communities who take risk and create value alongside investors and lenders are fairly compensated for these contributions. By contrast, redistribution happens after the fact. Although one would think that increasing returns to capital versus labor might be good for institutional investors, this trend is actually detrimental to the economy in the long-term, since markets become imbalanced, aggregate demand is threatened, reliance on credit increases, and mistrust in institutions erodes stability. Since large diversified investors like pension funds, insurance companies, and sovereign wealth funds have portfolios that are highly diversified and essentially a slice of the economy, their financial returns are exposed to these long-term risks from inequality. In this podcast, Delilah speaks with Jahed Momand of the Ownership Economy about these trends, how rapid advancements in AI and automation are likely to exacerbate risks and inequality, and how employee and community ownership models, as well as increased participation by workers, communities, and consumers in corporate governance, can help avoid such risks.