Thursday, September 08, 2011

Do Companies Have a Duty to Satisfy Their Employees’ Best Interest?

Dear cafe patrons, I'm glad to introduce to you our new guest barista, Pramudya A. Oktavinanda. Pram, as he is called, is a lawyer at a well-known corporate law firm. He blogs too (see here or here). Oh, this "capitalist-lawyer" also tweets as @PramOctavy. Today Pram invites us to think about what is fair in employer-employee relation. Enjoy! - Kate

Do Companies Have a Duty to Satisfy Their Employees’ Best Interest?


by Pramudya A. Oktavinanda


Introduction


Imagine that you are a worker in a major telecommunication company that has two divisions, one is a land line division, which is getting smaller each year to due to a major decrease in demand, and the other is a mobile phone division, which is getting bigger each year and generating a huge profits for the company. Unfortunately, you work in the land line division.


Suppose that for this financial year, the company generates a net profit of more than US$100 million, and 99% was generated from the mobile phone division. The employees in such division receive a considerable amount of benefits including big bonuses and better salaries compared those in the land line division. In fact, the salaries of the land line division’s employees have not been increased for years - let alone receiving a bonus.
How about the management, i.e. the board of directors and board of commissioners? Since the company has performed so well, the shareholders have agreed to grant a fat remuneration in the total amount of US$10 million to the entire members of the management. So everyone is happy in the company, except for the employees of the land line division.


So, the worker in the land line division plans to conduct a strike, stopping the operation of the land line division until the company agrees to increase their employee benefits. They say it is not fair if the company has generated such a big profit yet only a small fraction of that profit is being used for the benefits of their employees, specifically in the land line division. In their opinion, the company has a duty to satisfy their employees’ best interest, including their well-being. The major question is, do you think the company has such kind of duty?


The Company Does Not Have a Fiduciary Duty to Its Employees


As cruel as it may seem, our law says that a limited liability company does not have any fiduciary duty to employees. Fiduciary duty to a party means a duty to act in good faith for the best interest of such party. In fact, the company management only has fiduciary duty towards the company (yes, not even the shareholders). And what’s the best interest of the company? Its survivability, which can only be maintained when the company is profitable. A management that does not work for the best interest of the company can be sued by the company shareholders for any losses that they or the company may face due to the management’s failure to adhere its duty.


Of course this is troubling to some of us. How can we say that it is fair for the employee in the land line division if the management does not have any duty to improve their well being despite having a large amount of profit? To answer this, I will move on from the legalese, and give you another case to think about.


Let us imagine that now you are acting as an employer to two persons in a small firm that produces cute necklaces. The first person almost contribute nothing to the business while the other one is very productive and has contributed a lot of necklaces that worth selling in the market. What will you do in this case? Will you differentiate the salary of these two guys? Will you give better payment to the more productive one?


Or try imagining other case where you and your two friends invest in a business. You and one friend invest 90% of the total capital while the other one only invest 10%. After the business generates nice profits, will you share more to the one who only invest 10%, or will you distribute them proportionately with the money contributed by each person?
I would assume that in both cases, you would agree that those who contribute more should receive better benefits than those who contribute less. So why don’t we apply that principle to our first case? The law regarding fiduciary duty of the company’s management is in line with the basic rule of efficiency, i.e. resources should be allocated to the ones who are able to put it to the most highly valued use. Wasting money for a non profitable business would be deemed inefficient and the management can be held responsible for that. Sadly, our case involves the lives of many people and this is where the dilemma comes.


Can The Government Intervene?


My first response is no. The difficulty lies within the baseline or the original position that we should held when we want the Government to involve in this kind of case. I know that our case can easily attract sympathy. After all, it’s the story about a greedy company/management that does not care about the well being of its employee. But suppose we change the story a bit, suppose we’re talking about a paging business. I am not sure whether there are still many people who remember the success of paging business, but around 10-12 years ago when mobile phones are still expensive, pager is a cheap and quick solution for companies who want to contact their employees whenever and wherever they are. Yet, technological advance and the growing of people’s income enable mobile phone producers to cut their prices significantly to the extent that almost all people can own their own mobile phone. The effect was disastrous for paging business. What started as a profitable business turned out to become a bleak one. And now, I am quite certain that not a single paging company in Indonesia survives the competition with mobile phone. The iron rule of efficiency once again wins.


In this case, since the paging companies were going bankrupt, most of their employees were layed off. Now, does the Government needs to help these poor guys? Do you find similarities with our first case concerning two separate divisions in a telecommunication company? Both types of employees suffer because of technological development, something that can’t be prevented by anyone (or what economists call “creative destruction”).


Indeed, this is what I call as a hard case. To find an all for one solution would be impossible. Asking the Government to force the company in our case to provide better benefits to its land line division would be ludicrous, and it is questionable whether the government should do the same for the other type of victims of creative destruction. If you are in the employer position, would you like to be forced to bear additional inefficient expenses?


But if the Government does not take any action, who will be responsible for all of these employees? Would it suffice to let them follow the flow of the market force? My initial answer is provide a better social security to the citizens but I would love to hear other people comments on this matter.

6 comments:

  1. Geez... how simple can simplification be? To compare the landline telecom worker with a cute non-productive necklace maker helps to forward the author with his case, but it doesn't tell the whole story. It *assumes* that the landline worker does not have a contribution whatsoever to the telecom company. Let me bring about different look into it: If we take a longer time frame, it can be proven that it was the landline worker who helped the telecom company to generate enough profit to expand to mobile business. And to disregard this contribution blatantly is unfair to the core.

    In a dog-eat-dog world, company does not have responsibility whatsoever to their employee. That's where we need regulation. After all, companies consists of individuals, and who benefits from company's profit does not necessarily depend on "contribution" to profit as the author argues, but where you are situated in the food chain. If "contribution" is the main factor, so many Wall Street executives would have been fired. If you see board of directors of so many Wall Street financial companies, you see a deep incestuous relationships.... A CEO in one company is a member of Board of Director in others: They reward each other with the understanding that they in turn will be rewarded.

    Companies who are good to their employees ARE NOT necessarily in the red. In fact, most are thriving and successful:
    http://money.cnn.com/magazines/fortune/bestcompanies/2011/snapshots/1.html

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  2. nice your blog This site has lots of very useful information on it!

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  3. Too bad. It'd be great if companies viewed themselves as having a responsibility to act in their employees' best interests. It would help more people feel like they were having an occupational dream year.

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