How including labour can improve corporate governance

Involving labour in decision-making has the potential to improve corporate governance, even in adversarial industrial relations systems such as the ones found in Anglo-American economies. Think of corporate governance as an information problem with potentially dramatic distributive consequences: how do shareholders and other interested parties to the activities of a company know that management is working in their best long-term interest? Without labour on board as a vocal actor in corporate decision-making, profits, often defined as short-term gains, will trump other considerations, while a system in which labour holds veto powers is likely to lead to lower profits, ceteris paribus. If both labour and business are represented in decision-making, however, the information asymmetries that each faces are significantly alleviated by the presence of the other, which leads to more balanced outcomes. Representatives of business – financial institutions, suppliers, or other firms in a similar industry know relatively little about how a company is run, but a lot about how the company is doing in its key product markets. Labour, on the other hand, may have only a tenuous grip on competitive strategy, but is highly cognisant of how the company is run – it has to deal , after all, with the problems that arise. A board system, not unlike the north-west European one, where representation is shared among these two key actors, thus forces management to be transparent and take into account the preferences of both.