Present value, ownership and governance
By Tom Powdrill, Project Lead, Broadening Corporate Governance Participation
In any given public company we have in the share price an immediate consensus snapshot of the present value of future returns to capital. These prices can move significantly from the underlying fundamentals, but market participants understand what they are saying in broad terms.
Labour also has a similar ongoing interest in, and expected income stream from, the firm. This is more stable and contractually determined (until terms and conditions are altered) and could be used to determine the present value of the workforce’s income stream. We don’t see it because that income stream can’t be traded and there is no public market for it, but there is an implicit present value in the shadows.
The payment for these income streams differs between capital and labour. Capital pays upfront the consensus estimate of the present value – the share price. Workers pay as they go, exchanging their labour for income.
However, labour cannot diversify risk to its income stream in the way that capital can. Relatedly, the contribution (labour) that workers make in return for their income stream is often not fungible - skills are tied to the sector or even the specific employer and so may have limited value elsewhere.
These income streams can also be extinguished. When firms buy back shares, they reduce the number of capital claimants without reducing the present value of capital’s remaining interest. Job cuts similarly reduce the number of labour claimants, but in this case the present value of labour’s interest is reduced directly.
Indeed, it is not uncommon for the present value of capital’s interest (expressed in the share price) to increase in response to news that the present value of labour’s interest will fall, for example due to job cuts.
The differing but connected valuations of capital and labour’s interest are not only clarified on news of job cuts. Even changes to the nature of workplace rights, and thus the ability to claim income, are valued. The positive market reaction to Prop 22 in California, which denied rideshare drivers employee status, is illustrative. When the ruling was upheld, the shares of companies such as Uber and Lyft surged. At least in part the market was shadow pricing the value of what workers would not receive.
Meanwhile the boards of companies are constructed and guided to respond to capital’s interest. In the US and the UK workers have no right to representation in governance and the public company board’s attention is attuned to capital markets. Employee ownership is also limited, giving labour very limited potential upside exposure.
This has important implications when industries are facing a secular reduction in jobs, for example as a result either of technology (automation, AI) or of public policy (decarbonisation). In such situations, the present value of labour’s interest is threatened with severe reduction, perhaps close to elimination, and this is by design. But any benefits resulting from this accrue to capital rather than labour.
If left to continue these trends threaten to exacerbate inequality between those who principally earn income through labour and those who earn through deployment of capital. It is systemic factor in how our companies function currently, and this could have significant consequences in sectors facing structural change.
Particularly where skills are not easily transferable and existing jobs are geographically clustered the impact could be very severe. It would not be hard for populists to weaponise workers’ legitimate grievances, as history suggests they will, if this potential impact goes unaddressed.
This makes the case for enhanced employee participation rights – both governance and economic – particularly compelling in those sectors where jobs are under threat.
Rideshare and autonomous vehicle companies are among the clearest cases where these questions will become acute. The business model is explicitly designed to reduce, and ultimately eliminate, human labour. Drivers are the largest cost and the primary target of automation. In this case, reduction in the present value of drivers’ income stream is not incidental it is inherent to the business model. Yet the gains from that elimination will flow entirely to capital unless the model is changed.
Enhanced participation rights offer one way to change this. Worker representation on boards would give labour a voice in how and at what pace automation is deployed, and on what terms workers exit before the present value of their income is destroyed rather than after. Meanwhile equity participation would give workers a direct claim on the capital upside that their displacement generates.
The argument is not that automation should be prevented. It is that those who bear the cost of a transition that is designed to eliminate their income stream have a say over the process and a claim on its benefits.