The board of directors is the corporate seat of power. Those are the guys to lobby if you want to see corporations dishing out money to the poor and hungry instead of hoarding it for the greedy shareholders.
Instead of wasting time putting pressure on shareholders to play nicely and make sure corporate profit is used to advance worthy causes, we could go straight to the decision-makers. That’s the board. If we can pack the board with our guys, even better. This is where the law comes in. Law can help by making rules about who should sit on the board.
So: employee representatives on the board of directors or at least on the remuneration committee should produce some great results for income equality. Expanding the remit and focus of the board of directors by including employee representatives has been canvassed from time to time in the UK, receiving a detailed consideration in the Bullock Committee Report in the 1970s and more recently in the discussions surrounding the harmonization of European company law through worker participation in the European Company (Societas Europea, an EU corporation that has its very own special statute to encourage workers on the board of directors).
The UK’s Corporate Governance Code and the Sarbanes Oxley Act in the US encourage board-level oversight of executive pay through audit and remuneration committees comprising independent outside or non-executive directors. Neither of these jurisdictions provides for workers on the board although individual corporations are of course free to do so if they wish. Those concerned about income inequality hope that diversifying the board of directors through mandating inclusion of representatives of workers and other independent non-shareholder constituencies. There are many good reasons to expect such positive economic effects from employee participation in corporate decision-making at the highest level: employees can bump up their own wages, which will make them feel happier, and everybody knows that the happier we are, the harder we work:
The potential significance of board structure on pay is illustrated by a study of nearly 2000 firms in the UK covering the period from 1983 to 2002, which found that board structure, in particular the proportion of non-executive directors, has a significant impact on executive pay.
The study reports that firms with at least 3 non-execs or NEDs ‘experience a lower rate of increase in executive pay levels and an increase in pay–performance sensitivity’. This demonstrates the potential for the board, and especially NEDs, to influence remuneration levels. Indeed the agency-cost literature has long noted the efficiency benefits of remuneration being set by NEDs.
In the UK, a series of corporate governance reports has recommended an increasing number of NEDs, from the Cadbury report which recommended having at least 3 NEDs on each board, to the Hampel report which recommended NEDs increasing to one-third of the board and then the Higgs report that thought NEDs should constitute half of the board. Never having sat on a board of directors, I am filled with visions of half the board being a hostile crew staring down the executive managers until they agree to take a pay cut. But I’m assured by people who know more about these things that there’s no hostility and everyone is friends together in a ‘you pat my back and I’ll pat yours’ sort of way. Ah, bless.
But NEDs will only make a difference if they are effectively independent in practice. So it’s interesting, and it causes deep suspicion in places like the High Pay Centre where folks are very worried about these things, that NEDs are often executive directors at similar corporations. It’s almost like an old boys’ club. (Editor: hey, it’s not the 1950s. These days there are kick-ass women on boards of directors, and no, it's not polite to refer to them as Golden Skirts). NEDs are suspected of reflecting the same set of priorities as the directors they’re supposed to be monitoring: a recent study by the High Pay Centre found that ‘Of the 366 nonexecutive directors who sit on remuneration committees [only] 37 are not from business or financial intermediation; that is just 10%’.
In any case, it’s not clear why people would expect NEDs to be more altruistic than the executive directors. NEDs are just as likely as anybody else to prefer their own interests to the interests of the corporation particularly if they are keen to retain their board appointments or acquire new positions. This means they too have similar disincentives in embarking on a quest to clamp down on executive pay: ‘developing a reputation for haggling with the CEO over compensation would hurt rather than help a director’s chances of being invited to join other companies’ boards.’ (Bebchuk and Fried, 2003). Even if their own self-interest is not in issue NEDs might not effectively challenge pay levels: ‘directors usually lack easy access to independent information and advice on compensation practices necessary to effectively challenge the CEO’s pay’ (Bebchuk and Fried).
Really, the only way you’re likely to get a board of directors to slap the fat cat executives upside the head, dock their extravagant wages, and give all the money to the poor, is by appointing some fierce medieval monks to run all the corporations. The monks of long ago were very efficient at requisitioning rich people's money and using it to feed the poor and the hungry. They built vast charitable empires that spanned the entire globe - not even McDonalds or Walmart can compete with guys like the Cistercian monks who had impeccable moral credentials (very important, obviously) and also managed to revolutionize the 12th century European economy. Their performance was more satisfactory by far than that of today's boards of directors. Most boards today deliver the economic progress we expect but are woefully lacking in charitable instincts. Alas we can't go back in time but never mind, by the time the law is done working on them the boards of directors of the future will be transformed into charitable bodies worthy of the finest monasteries. Corporations will be famous for their selfless good deeds, and they will stop pillaging the Earth and trampling on the poor while selfishly paying themselves far too much money.