Lawyers’ and Law Professors’ Experience with Worker Governance

Why is the adoption of worker governance in American companies so limited? Why do American corporate law professors pay so little attention to worker governance? One answer to these questions is that worker governance is costly and ineffective, and thus rightly ignored. But some, like me, find worker governance a potentially transformative way to improve corporate governance. We have to give a different answer to the questions posed above. An answer I have given before is that the obscurity of worker governance is self-reinforcing. Its limited occurrence means those involved in corporate governance have little reason to pay it much attention, and that lack of attention then reinforces the ongoing limited adoption of worker governance. Theories of path dependence in institutional evolution suggest such self-reinforcing mechanisms can lead to inefficient equilibria.

But I face an embarrassing fact. Worker governance is not common in most of the American economy, but versions of it are quite common in workplaces well known to lawyers and law professors: law firms and universities. Lawyers play a major role in advising new businesses on what legal form to take. Law professors are central to the study of corporate governance, and they train the lawyers who advise startups. That observation calls my path dependence explanation for the limited adoption of and attention to worker governance into serious question.

How to respond, without admitting defeat? In a recent paper, I first consider the leading critique of worker governance and the path dependence response. I then look at the nature of worker governance in law firms and universities (especially at law schools) and ask how the experience of that governance has affected lawyers and law professors.

Worker governance has a number of potential advantages. Many workers make extensive firm-specific investments in human capital or are, in effect, residual claimants. Workers also have much information about what is going on within a business, which could lead to better decisions. Balanced against these benefits of worker governance is a major potential cost that has been extensively analyzed by Henry Hansmann. Involving workers along with shareholders in governance could lead to higher costs in agreeing on decisions. This is not only because workers and shareholders often have conflicting interests, but also because workers differ in many important ways among themselves, leading to internal conflicts. Though recognizing the benefits of worker governance, Hansmann argues that the costs outweigh the benefits for most businesses. But there are some areas where that is not so, with professional organizations such as law firms a leading example. Hansmann believes the prevailing distribution of worker versus investor governance reflects the relative benefits and costs in different types of businesses.

The path dependence response accepts this basic story but adds a twist. The benefits and costs of any governance type are not set in stone. As a type of governance becomes more common, practices and institutions arise to increase the benefits and decrease the costs. In an economy where worker governance is more common, many types of persons—workers, providers of capital, lawyers, bankers, accountants, consultants, and so on—will be more aware of worker governance as an option and will develop mechanisms to make it work better. Worker governance will thus be comparatively more effective for a wider range of businesses. In the US economy, the opposite is true. A part of this process is that those advising new businesses, such as lawyers, will just not consider worker governance as an option outside the small range of industries where it is more common.

Hansmann is aware of this lack-of-awareness argument, and finds it implausible precisely because many professionals themselves work in businesses where they are owners. As he argues, ‘[t]hey cannot be unaware of the benefits of employee ownership or opposed to it on principle. At most they can be accused, rather implausibly, of hoarding the benefits of employee ownership for themselves and—whether out of spite or just lack of imagination—denying those benefits to firms in other industries.’(Henry Hansmann, The Ownership of Enterprise (2000)88)  

I believe that spite (better: privilege) and lack of imagination are quite plausible. I look at the experience of governance in law firms and law schools to make that point.

Law firms feature a form of worker governance: only lawyers may be partners. But it is highly partial and hierarchical. Non-lawyer workers need not apply. Professional responsibility rules generally forbid non-lawyers from becoming partners. Even among lawyers, firms are increasingly hierarchical. Many junior associates will never make partner, and even among partners there is much stratification in both governance participation and pay. Lawyers justify their legally entrenched position with their status as professionals. They are privileged with high ability, rigorous training, and sophisticated knowledge. This justifies their grant of power, but with a responsibility to serve the public. Governance for some, but not for all, is what they observe and perpetuate in their own workplace.

What does this entail for how lawyers think when they advise clients forming their own businesses? Lawyers do not see themselves as workers engaged in worker governance. They are professionals. Self-governance is for the professional elite, not the average worker. That is mostly not a conscious thought. Rather, it is a widespread, and yet rarely noticed, background understanding. 

What about law professors? They matter in answering our original two questions. They are a key group in determining what is written about worker governance. But even for the underlying distribution of worker governance, law professors play a role. They train and indoctrinate the business lawyers who help form new businesses. What about professors’ experience of self-governance? Most law professors spent some time in a law firm, so they observed worker governance there. What, though, of their experience of self-governance as professors?

Law professors experience a significant degree of worker governance in a way that resembles partners in law firms. Professors have much control over faculty hiring and promotion and the curriculum. Other employees, as well as other stakeholders such as students, do not. Even among professors, there is variation and hierarchy, with untenured faculty and adjuncts shut out from governance and faculty who move into administration getting much more authority. Compared to law firms, the scope of faculty governance is more limited, as boards of trustees and professional administrators control many types of decisions, crucially including budgets. Still, professors jealously guard their authority over areas traditionally assigned to them (even while dreading faculty meetings). And professional norms play a huge role in their justification and self-understanding.

The consequences for how law professors think about worker governance are similar to those for lawyers. Just as it does not even occur to us to give our administrative assistants a role in law school governance, we do not consider the benefits of worker governance as a lesson to take from our own experiences. This mostly goes unquestioned and unnoticed. Privilege and a lack of imagination indeed, despite Hansmann’s doubts as to this as an explanation.

Brett McDonnell is the Dorsey & Whitney Chair and Professor of Law at the University of Minnesota Law School.

The author’s article on which this post is based can be found here.