The Place of Workers in Corporate Law

Abstract:     
This article critiques the low place of workers within corporate law doctrine. Corporate law, as it is traditionally taught, is primarily about shareholders, boards of directors, and managers, and the relationships among them. This is despite the fact that workers provide an essential input to a corporation's productive activities, and that the success of the business enterprise quite often turns on the success of the relationship between the corporation and those who are employed by it. Black letter corporate law requires directors to place the interests of shareholders above the interests of all other "stakeholders," including workers.

This article analyzes and criticizes the arguments for shareholder dominance. The article proposes that implicit, and often incorrect, assumptions about workers form an important building block for corporate law theory and doctrine. Moreover, justifications for shareholder dominance -- traditional notions of ownership; agency costs; the residual nature of shareholder claims; and the inability of shareholders to contract with management -- are not as strong as sometimes proposed and often apply to workers as well.

Indeed, the dominant contemporary justifications for shareholder preeminence do not adequately distinguish the interests of shareholders from those of workers. Workers, too, bear agency costs of monitoring management to ensure that management fulfills its part of the implicit and explicit understandings that define the relationship. Workers, too, retain an unfixed, residual interest in their firm; their fortunes rise when the company does well, and they are worse off when the company founders. Workers, too, enter into long-term, relational contracts with management in which it is very difficult to reduce all important aspects of the agreement to writing. The fact that workers have much in common with shareholders argues for a closer examination of the affirmative arguments for the creation of fiduciary duties running to workers and for worker participation in company management.

Moreover, there are reasons to doubt that what one observes as a positive matter in corporate law is an accurate reflection of the preferences of all the parties to the corporate "contract." Because of inefficiencies in the labor market (many of which are simply assumed away in the corporate law scholarship) workers have much less ability than shareholders to exact bargaining concessions from other contracting parties or to walk away. Also, these inefficiencies make it more possible that the shareholder/management "contract" externalizes some of the costs of their agreement onto workers.

Accepted Paper Series