When we come to think of firms as political actors in the global scene, we tend to focus on their external political aspects. Those aspects pertain to the influence companies wield on governments, and vice versa. These have recently drawn a lot of attention to the public. Examples include the meddling of Russian hackers in the American elections via Facebook, the notorious role Shell and Unilever have played in the shaping of the Dutch tax system, and the EU’s struggle to impose privacy laws on data aggregators like Google.
These interactions between governments and firms certainly merit our attention. By exclusively putting our magnifying glass on these and related phenomena, however, we tend to overstate the importance of firms’ involvement in external political affairs. At the same time, we largely neglect the internal political properties of these firms.
According to Isabelle Ferreras, a deeper understanding and a fundamental change in the power structures that shape corporate hierarchies may offer a solution to today’s multilevel crisis. In her new book “Firms as Political Entities”, she argues that the democratization of companies could prove effective in dealing with our current economic, social, environmental, and political problems. This book thus offers both a descriptive and a normative perspective on firm governance.
Power in the Firm
The book consists of three parts. In Part I, she first elaborates on the history of power in the firm. Highlights of this history include the installment of labor laws to protect workers, the widespread emergence of labor unions by the end of the 19th century, and social welfare provisions.
Over time, workers thus got more influence in the firm. In some companies this has evolved in the establishment of works councils. These are organizations that represent workers in the firm and act as a complement to trade unions. In a number of large German companies after WWII, their competences have culminated in what is called co-determination (Mitbestimmung), meaning that workers are allowed to vote on important decisions along with the board of directors.
Answering a stupid question
Part II of the book deals with the question: “What is a firm?”. Although this may ostensibly be an easy question to answer, Ferreras shows that many have been indoctrinated by the theory that the firm is the same as a corporation. However, the corporation is merely a legal entity to generate returns on capital investments. This embodies the idea that firms operate on the basis of instrumental rationality: they exist to make profits.
Usually, investors indeed view firms from the perspective of instrumental rationality. However, an entirely different type of logic drives workers. For example, they aim to actualize their creativity and express their capabilities. Engineers, for instance, often have a genuine passion for the designing machinery or building constructions. In sum: workers are propelled by expressive rationality.
These different types of rationality are often in conflict with one another. Labor and capital investors, propelled by instrumental and expressive rationality respectively, usually don’t share a common goal. Both groups pursue their own interests in the firm, leading to the establishment of power relations between them. The firm is an entity in which they must continually bargain and interact with one another to establish a consensus. Taking these power relations into account, the firm can be cast in a new light. It is a political entity.
A Radical Proposal
In Part III, Ferreras draws an analogy between the governance of states and the governance of companies. During their transition from despotism to democracy, states always experienced a so-called bicameral moment. When a large number of people feel that their rulers have treated them unfairly, at some point they protest and demand a say in governance.
In England, for instance, this has resulted in the establishment of the House of Lords and the House of Commons (which represents the people who are less well off). Such a dual government structure was implemented after years of unrest, civil war, and regicide. The establishment of a bicameral legislature represents a compromise between two interest groups to ensure and maintain social cohesion.
Returning to the case of companies, it seems rather odd that a corresponding bicameral moment has not occurred yet. Firms nowadays still seem to be stuck in a situation in which one interest group (the capital investors) maintains all power. From a state’s perspective this is akin to an aristocracy, or perhaps even a dictatorship in case only one investor holds the majority of shares.
Although workers have gained more rights and power over time, a true bicameral moment has not occurred yet in the corporate realm. Even the establishment of co-determination in some large German companies was not enough. In that case, the law required slightly fewer representatives of workers on the board allowed than capital investors’ representatives. Thus, they were legally not ensured to have an equal say in the company’s affairs.
Now Ferreras wonderfully extrapolates and synthesizes her ideas and observations described in the previous parts. She argues that today’s type of firm governance is illegitimate because it represents only one constituent body: the capital investors. However, both the workers and the investors are constituent bodies of the firm. Without labor and the workers investing in it, there is no firm. Thus, both groups ought to represent the firm, allowing for the concurrent realization of the respective rationalities that drive them.
It is Ferreras’ conviction that these two constituent bodies should be represented by elected officials in two chambers of representatives: the “Capital Investors’ Chamber of Representatives” and the “Labor Investors’ Chamber of Representatives”. Together, they form a two-chamber parliament of the firm. As such, they jointly function as the legislative power. Any policy that the government of the firm (the executive management) wishes to enact would have to obtain a majority of votes in both chambers.
In such a construction, the firm’s power is divided among both the capital and labor investors. They now each have the possibility to veto or put forward company laws to serve the interests of their respective interest groups. As company governance is now more complex, representatives of these groups are forced to engage in constructive dialogue with each other to effectively rule the firm and satisfy all those involved with it. Ferreras calls a company with this dual governance structure a bicameral firm.
By putting forth the concept of the two-chamber parliament in firms, Ferreras aims to prevent history from repeating itself. To understand this, we can draw upon Karl Polanyi’s analysis of Germany’s descend into fascism during the 1930s. The Austro-Hungarian economist and philosopher observed that German society could not tolerate the effects of laissez-faire, free-market capitalism anymore.
When the political elites seemed to remain idle and unresponsive to the grave economic problems, many people submitted to an extreme form of nationalism (Nazism) that promulgated oversimplified ‘solutions’ based on hateful ideology. Although it hasn’t come to this anywhere at the moment, we can currently observe similar tendencies in some countries.
In the 1970s, financial liberalization, deregulation, and privatization were pursued as the foundation of the neoliberal program. This agenda has become the ideological consensus in the 1990s in both Europe and the United States. During the aftermath of the 2008 financial crisis, which could have acted as a catalyst of change, little has been done to alter the status quo.
Nowadays, societies are seeking to protect themselves from the reign of free markets once again. This is reflected by Trump’s “America First” creed and the protectionist measures he adopts. If one understands the problem of globalization as a problem of markets, then the logical political response is to close off borders and prioritize the domestic population.
At this point, Ferreras juxtaposes her own proposal with the so-called “fascist solution” Polanyi described, and interferes. The free market itself might actually not be the core problem. From her point of view, the underlying problem sits rather with the actors – that is, the corporations that are empowered by the free-market ideology.
While companies organize capital, they aren’t held accountable and their power is barely restrained. The ratification of free-trade agreements like TTIP and CETA, with their infamous ISDS clause, illustrates governments’ willingness to even undermine their own authority in favor of large conglomerates. Thus, Ferreras’ book offers an alternative to the fascist solution to free-trade extremism by proposing a means to democratize the firm itself.
In my opinion, “Firms as Political Entities” is a very original contribution to the literature on corporations. As far as I am aware, no one has yet conceptualized the two-chamber solution as an analogue of just state governance. Moreover, the book is well researched. Ferreras draws upon an eclectic array of academic fields, including philosophy, economic history, sociology, and organizational science to solidify her arguments.
In addition to analyzing the internal political dynamics of firms from multiple academic points of view, Ferreras also offers persuasive arguments for the bicameral firm on several levels. These include the historical continuity of firm democratization, the analogue with the history of state governance, and the process of de-privatization of the working environment over the past centuries. The last aspect highlights the fact that firms are increasingly operating in the public sphere, which reinforces the idea that their governance structures ought to be similar to state governments.
Moreover, Ferreras insightfully observes that workers also invest in firms in terms of providing their labor. Although the nature of the types of investments differs substantially, this crucial insight allows for the possibility to view workers as equal to capital investors. This in turn makes the justification of dual governance much more plausible.
As far as the solution itself is concerned, I’m enthusiastic, albeit with some cautious reservations. It remains to be seen whether the implementation of her proposal would indeed remedy these crises. Although there are currently worker-owned cooperatives like Mondragon, it seems that no bicameral firm yet exists. The radical novelty of her ideas is both inspiring as well as slightly tensive.
Yet, it is clear that her concept of the bicameral firm would enlarge the scope of the democratization project. By shifting our focus from state governance and external corporate politics to the internal affairs of firms, Ferreras constructs an original approach to reframe the conceptualization of our problems. Her daring solution may just be what is needed to prevent the repetition of history and the disastrous consequences this would hold for the future.
Furthermore, I applaud Ferreras for putting forth this bold and well-argued attempt to tackle the crises we currently face. She rightly observes that scholars all too often hide behind the idea that their role is to merely offer diagnostics. I concur with her conviction that, especially in such a crisis-riddled age such as ours, they have the responsibility to provide concrete proposals as well.
For taking on this responsibility seriously and with such verve, Ferreras and her book deserve the highest praise. 5/5