Should employees get primacy in corporate governance?

Large number of jobs in the information technology (IT) sector is at stake. Automation and new technology are disrupting the industry. Skills that created value so far are becoming redundant. New skills are required to work with new technologies, such as, big data, artificial intelligence, Internet of things, robotics and virtual reality. Companies have started up-skilling existing employees and recruiting those with required skills. Employees, who are unable to acquire new skills, are losing jobs. 

In the above context two questions have emerged. The first question is whether it is better for the top management to take pay cut rather than to lay-off employees in difficult years. The other question is whether IT employees should form union to protect their interest when the going is tough. The first question is relevant when the job loss is due to a slowdown, which is transitory. In that situation, the pay cut by the top management will be for a short period in order to retain the talent that will be used after the bad period is over. It is not relevant when jobs and skills become redundant due to disruption caused by technological advancement or some other mega event. The second question is relevant in all situations from the perspective of employees. Bargaining power is relevant in all types of negotiations and collective bargaining is desirable when individual bargaining power is low. Protecting the job during tough times or securing adequate compensation when a job is lost requires hard negotiation with the employer. Therefore, it is no surprise that employees, including IT employees, have the propensity to form union. 

There are no straight answers to both the vexed questions.  

Although the IT industry is in focus at present, such disruptions occur in almost all industries with fast changing technological, social and geopolitical environment. Therefore, it is appropriate to examine the issue from the perspective of corporate governance. 

Companies create value through its operations while complying with law and social norms, and taking care of the social and environmental concerns. A very small portion of the value is shared with socially and/or economically marginalised population of the society through Corporate Social Responsibility (CSR). Shareholders, customers, providers of inputs (including human capital and debt capital), and government share the value created by the company. Government gets its share through direct and indirect taxes. Companies, through industry associations or otherwise, lobby with governments to reduce their share of the value. The share of customers and input providers in the value created by the company depends on the market forces and their relative bargaining power vis-à-vis the company. The share of shareholders is the residual amount. Shareholders’ primacy is well established in corporate governance. Therefore, companies focus on creating ‘shareholder value’ while being ethical and fair to other stakeholders. There are two reasons for the same. First, financial capital is sticky in the sense that once invested in non-financial assets (such as, plant and equipment) to build capacity, it cannot be recovered without substantial loss. Second, the non-controlling shareholders after entrusting their fund to the company cannot participate in strategic and operating decisions. In absence of focus on creating ‘shareholder value’ and effective monitoring, the management might misallocate the resources causing depletion of shareholders’ wealth permanently. 

Human capital is also ‘sticky’ like financial capital. After completing substantial period of employment in a company, employees develop specialised skills, which are not useful in other industries. Consequently, their market value outside the industry is very low, almost zero. Similarly, when business model or technology changes many of those skills become redundant. Therefore, those who lose job due to change in the business model or technology cannot find an alternative employment. In this context it is important to consider whether employees should also be considered as a primary stakeholder along with shareholders. Companies should focus on both ‘creating shareholder value’ and ‘protecting and creating employee value’. 

It is not enough to merely honouring the initial employment contract with an employee. It is important that employees are trained to acquire skills that would be needed in future, when the company sees disruption coming, that is, much before the disruption occur or the company plans to change the business model. Companies should ensure alternative livelihood for those who cannot acquire new skills, particularly if they are low-paid employees. 

The issue is complex, particularly because companies engage large number of employees on short-term contracts and off-role. It deserves serious debate among academicians, regulators and practitioners of corporate governance. 

The writer is adjunct professor in the Institute of Management Technology (IMT) Ghaziabad; and Chairman of Riverside Management Academy; e-mail: asish.bhattacharyya@gmail.com