TCS Daily


Happy Hierarchy?

By Stephen Bainbridge - May 12, 2006 12:00 AM

In his recent book, Shareholder Participation and the Corporation: A New Perspective, Australian corporate law scholar James McConvill draws on "recent empirical studies into human happiness" to argue that "shareholders, particularly individuals, should be included in the internal governance framework of public corporations, and enjoy a direct participatory role in the corporation if they so choose."

McConvill relies on behavioral research claiming that active participation in the organizations of which one is a part are one of the key lifestyle factors positively correlated with personal happiness.

This is the first time happiness has been advanced to justify shareholder participation in corporate decision-making. The happiness research usually is deployed so as to justify participation by non-shareholder corporate constituencies in corporate governance, especially corporate employees.

One immediate problem with McConvill's argument is that it is difficult to cabin participation rights granted on the basis of promoting happiness to a single constituency. Indeed, if this is the basis on which participation rights are to be assigned, other corporate constituencies would have a far stronger claim than diversified investors who own stock in many companies and often are active traders. In particular, if this is the basis on which we allow participation, employees, who generally work for a single firm and often find community and solidarity at work, would have the strongest case for participation.

A second problem is that the literature on happiness and participation simply isn't very persuasive. The bulk of the research focuses on claims relating to employee happiness, attempting to link participation rights to productivity. As I detailed in Corporate Decisionmaking and the Moral Rights of Employees: Participatory Management and Natural Law, the literature's claims simply don't hold up on close examination.

As John Witte contended in his important case study of self-directed work teams, "there is little reason to suspect that most workers would either endorse participation or become actively involved if the opportunity arose." To the contrary, Witte posits that workers generally accept hierarchical authority and perceive obedience to authority as an integral part of their job: "for the majority, disobedience is unthinkable."

Witte's pessimistic prediction is confirmed by a wealth of data. Only about half of the participants in Witte's own case study were willing to change jobs in order to get more participation and that rate declined rapidly if doing so would require longer hours or lower pay. A study of transportation firms found that long-term use of employee involvement initiatives increased stress and decreased employee fulfillment. [Anderson (1996).] A study of "empowered" employees versus a control group of unempowered employees within a single insurance company found no statistical difference between the two groups on such productivity-related issues as motivation or even on some job satisfaction measurements. [Thorlakson & Murray (1996).]

In unionized plants, rank and file workers have often resisted collective bargaining agreements that included employee involvement. In firms adopting self-directed work teams, ten to twenty percent of employees will resist the change because they prefer a mundane job to the greater responsibility and higher expectations associated with team membership. Other studies have found even higher rates of resistance: Participation rates in voluntary participatory management programs range from a low of 33 percent to a high of 68 percent of the eligible workforce. [Miller & Prichard (1992).] Conversely, nonparticipating employees in that study showed interest in volunteering for employee involvement programs at rates ranging from a low of 15 percent to a high of 63 percent.

Why does such a high percentage of workers appear to prefer hierarchy? Some are simply being economically rational. Behavioral patterns that are learned over many years, and reinforced by past rewards, are exceedingly difficult to change. As such, many firms will experience a path dependent resistance to participatory management. Introduction of participatory management within a firm typically entails substantial change, which will threaten vested interests in the workforce. Self-directed work teams threaten the seniority -- and even the jobs -- of foremen and other supervisory employees. Surviving supervisors are thrust into new positions as "team consultants" rather than bosses, with new and demanding responsibilities. Gain-sharing, pay for skills, and team-based compensation all threaten traditional seniority-based compensation. Training may be resisted by some workers: the old dogs who don't want to learn new tricks. The job rotation and stress on "continuous improvement" characteristic of self-directed work teams will threaten those workers who prefer a more mundane set of job responsibilities.

Studies of formalization -- the creation of written rules, procedures, and instructions -- provide an alternative explanation of the taste for hierarchy. Formalization reduces role conflicts and ambiguity, which increases work satisfaction and reduces feelings of alienation and stress. Employee involvement can trigger role stress because many employees lack the quasi-management skills -- agenda building, conflict management, and problem solving -- required for successful employee involvement. Alienation can result from the greater workload and negative changes in peer group relationships experienced by some participants in employee involvement.

Workers who respond well to formalization are poor candidates for participatory management, and vice-versa. This hypothesis is supported by findings that the success of a participatory management program largely depends on the personality of workers and managers. Workers with weak desires for independence are unaffected by employee involvement, while those with strong independence drives get increased job satisfaction from it. [Cotton (1993).] Based on the various studies recounted above, both types of workers appear to be present in the American workplace. Whether the taste for participation or for hierarchy is more common is hard to say from the evidence to date, but at the very least the history of participatory management has taught us that not everyone wants more autonomy, challenge, and responsibility.

Once the heterogeneity of worker tastes is conceded, government-mandated participatory management cannot be defended on Pareto superiority grounds. Those workers who have a taste for hierarchy would be worse off under such a mandate.

Most of these arguments would seem to apply with equal force to shareholder participation. Given the strong economic case against extensive shareholder participation, as I recently detailed in my UCLA Law Review article The Case for Limited Shareholder Voting Rights, I'm afraid I end up being rather skeptical of this new string in the shareholder empowerment bow.

Stephen Bainbridge writes a weekly column for TCS and teaches law at UCLA.

References

Ronald D. Anderson et al., Relationships of Work Improvement Program Experience and Logistics Quality Management Factors, 36 Transportation J. 20 (1996).

John L. Cotton, Employee Involvement (1993).

Robert W. Miller and Frederick N. Prichard, Factors Associated with Workers' Inclination to Participate in an Employee Involvement Program, 17 Group & Org. Mgmt 414 (1992).

Alan J.H. Thorlakson & Robert P. Murray, An Empirical Study of Empowerment in the Workplace, 21 Group & Org. Mgmt 67 (1996).

John F. Witte, Democracy, Authority, and Alienation in Work: Workers' Participation in an American Corporation (1980).

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