Duty Free (Not the Liquor Store): Tensions in the Duty of Loyalty for Employee-Elected Corporate Directors

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Analysts, commentators, and politicians have recently started proposing employee-elected directors as a remedy for labor relations issues.[1]  These director seats are common in other countries such as Germany, which requires employee representation on corporate boards by statute.[2]  Though employee representation on corporate boards may be required in Germany and other civil law countries, the fiduciary duties owed by corporate directors contrast with what the common law requires from directors in the United States.[3]  This post will analyze the duty of loyalty owed to shareholders as an employee-elected director attempting to be re-elected, a component of fiduciary duty.

The different responsibilities for corporate directors in the United States spurs interesting questions.  How does an employee-elected director represent the interests of her constituency while satisfying the fiduciary duties owed to all shareholders?  And, can these competing interests be aligned, or are they inherently divisive?

In the United States the fiduciary duty placed on corporate directors includes a duty of loyalty.[4]  “When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else, usually financially.”[5]  The Delaware Supreme Court defines the duty of loyalty as “act[ing]to make informed decisions on behalf of the shareholders, untainted by self-interest.”[6]  Generally, a for-profit corporation’s, and the shareholders’, goal is to engage in profitable business, which makes it a corporate director’s duty to make the corporation as profitable as possible.[7]

Employee-elected corporate directors owe a fiduciary duty to all shareholders and not just their electorate.[8]  As rational actors, employee-elected directors will seek re-election.[9]  This conundrum forces rational employee-elected corporate directors to find a medium in between the groups’ interests where they diverge.  If the director ignores her constituents, she will be ousted the next election.  If she overzealously advocates beyond what would be expected for a corporation to provide to its employees, then the Board of Directors may be susceptible to a derivative action for breach of its duty of loyalty to shareholders.

Any actions taken by a Board of Directors influenced by employee-elected directors may have substantial consequences for a corporation.  For example, directors of a manufacturing firm who know a product to be faulty may continue production to keep employees working.  While costly, potentially illegal, and morally wrong, such an action allows all parties (minus regulators and long-term investors) to be satisfied with the corporation.

Employee-elected directors on a board can lead to breaches of duty or these seats having high rates of turnover, but lack of worker representation may lead to poor labor relations.  For instance, an institutional investor in early 2019 started discussing placing employee-elected directors on Google’s Board after employees staged a global walkout.[10]  Allowing employee perspectives on a corporate board will likely aid employee relations and allow efficient collective bargaining.[11]

There is no easy answer to this question.[12]  Whichever path a corporation takes will have benefits and detriments toward the corporation’s culture, union relations, valuation, and potential lawsuits.


[1] See, e.g., Justin Fox, Opinion, Why U.S. Corporate Boards Don’t Include Workers, Bloomberg News (Aug. 27, 2018, 12:37 PM), https://www.bloomberg.com/opinion/articles/2018-08-27/why-u-s-corporate-boards-don-t-include-workers; Dylan Matthews, Workers don’t have much say in corporations. Why not give them seats on the board?, Vox (Apr. 6, 2018, 9:30AM), https://www.vox.com/2018/4/6/17086720/poll-corporate-board-democracy-worker-council-codetermination-union-labor; Jena McGregor, This investor wants to put an employee on Google’s board, Wash. Post (Feb. 20, 2019), https://www.washingtonpost.com/business/2019/02/20/this-investor-wants-put-an-employee-googles-board/.

[2] See, e.g., Supervisory Board, Volkswagen, https://www.volkswagenag.com/en/InvestorRelations/corporate-governance/AR.html (last visited Oct. 7, 2019).

[3] See id.; see generally Martin Gelter and Genevieve Helleringer, Fiduciary Principles in European Civil Law Systems, ECGI Working Paper Series in Law, March 2018, https://ecgi.global/sites/default/files/working_papers/documents/finalgelterhelleringer_0.pdf (comparing fiduciary duties in common law and civil law jurisdictions).

[4] See, e.g., In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 698 (Del. Ch. 2005).

[5] Fiduciary Duty, Legal Information Institute, https://www.law.cornell.edu/wex/fiduciary_duty (last visited Oct. 7, 2019) (definition of fiduciary duty).

[6] In re Walt Disney Co., 907 A.2d at 698.

[7] See Steven Pearlstein, Businesses’ focus on maximizing shareholder value has numerous costs, The Washington Post (Sep. 6, 2013), https://www.washingtonpost.com/business/economy/businesses-focus-on-maximizing-shareholder-value-has-numerous-costs/2013/09/05/bcdc664e-045f-11e3-a07f-49ddc7417125_story.html.

[8] See In re Walt Disney Co., 907 A.2d at 698 (stating that all corporate directors owe all shareholders a fiduciary duty).

[9] This is an assumption that is made for analytical purposes.  An elected representative may not want to be re-elected for other reasons.  For an alternative view, see Ethan Leib and David Ponet, Representation in America: Some Thoughts on Nancy Pelosi, Gavin Newsom, Tim Johnson, and Deliberative Engagement, 16 The Good Society 1, 3 (2007).

[10] See Jena McGregor, This investor wants to put an employee on Google’s board, Wash. Post (Feb. 20, 2019), https://www.washingtonpost.com/business/2019/02/20/this-investor-wants-put-an-employee-googles-board.

[11] See Lenore Palladino, Why Workers On Corporate Boards Just Makes Sense, Roosevelt Institute (Aug. 14, 2018), https://rooseveltinstitute.org/why-workers-corporate-boards-just-makes-sense.

[12] This is assuming a corporation does not want to become a Benefit Corporation, which would alarm shareholders due to a corporation’s social goals creating a large potential for derivative actions.  Cf. Doug Bend and Alex King, Why Consider A Benefit Corporation?, Forbes (May 30, 2014, 9:00AM), https://www.forbes.com/sites/theyec/2014/05/30/why-consider-a-benefit-corporation/#1b39e48465e9.

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Fordham Journal of Corporate & Financial Law