Why do so many businesses parade their humane values yet treat their staff so badly?

Form and substance in the modern workplace are, as we have been learning in recent weeks, not to be confused. Before Christmas the noodle chain Wagamama apologised after a charming printed note in one of its London restaurants was discovered warning staff: “No calling in sick!… Calling in sick during the next two weeks will result in disciplinary action being taken.”

In theory, the employees of that branch could claim all the usual protections of the law, including the right not to be expected to haul themselves into work if they weren’t well. In practice, they could not.

In theory, Gary Smith of Pimlico Plumbers was self-employed. That’s what his contract said. In practice, Smith was fired by the company after he tried to reduce his hours after suffering a heart attack, implying he wasn’t truly self-employed after all.

The form and the substance were very different things.

Not all examples of the gulf between the two are so eye-popping. Many of us will have had bosses who proclaim “my door is always open” when it really isn’t.

This form and substance dichotomy applies more broadly. Oxfam and Save the Children were, outwardly, communities of mutually supportive individuals striving to make the world a better place. But recent revelations have painted a picture of harassment, bullying and even predatory sexual behaviour towards disaster victims at these charities.

The BBC has long preached the gospel of equality for its workforce. But after discovering disparities of pay between men and women doing very similar jobs, many of the corporation’s staff now dismiss this as humbug.

On and on the scandal sheet of managerial abuse goes, from the English women’s football team to Parliament. 

But, you might object, isn’t this traditional hypocrisy from bosses, rather than an illustration of some deeper philosophical or economic point? Haven’t organisations always behaved in this way: presenting an appealing face to the outside world while behaving in an uglier fashion in private? Isn’t this the way of our fallen world? 

To some extent, yes. Since Adam delved and Eve span, there never has been a golden age of workplace harmony. Yet the gap between the carefully crafted public image and the reality has perhaps never been so yawning. 

Modern economies like Britain’s are increasingly services-based and customer-focused. Most companies now grasp that they need to pay attention to their image or risk a swift and possibly lethal backlash, especially faced with the speed and reach of social media.

The words “corporate social responsibility” – largely unknown in boardrooms three decades ago – have become ubiquitous. Every organisation now claims to be an equal opportunities recruiter when it advertises vacancies. All companies profess to care about their employees. Many even tell the world that their staff are their “most important asset”.

Yet the power relations within companies and organisations – between managers and the managed – have not kept up with this rhetorical revolution. Unionisation rates peaked in the 1970s and have continued to fall steadily ever since. Theresa May promised to put workers on boards in 2016 when she became prime minister. But the pledge was watered down to almost nothing after pressure from the corporate lobby.

One of the great economists of the 20th century, Ronald Coase, asked the question: why do we have firms? Why isn’t everyone self-employed, hiring out their services to an organisation, whether public or private, and maintaining maximum flexibility for themselves? The answer Coase came to was the incentive to minimise transaction costs. Drafting endless short-term contracts for each bit of work is onerous and expensive. It’s often more cost effective and profitable for us to organise ourselves into collectives, as employers and employees.

But how should relations between employers and employees within a firm or organisation be determined? By a long-term employment contract is the obvious answer. But not every future contingency can be covered by a contract. They are incomplete, something studied in detail by another eminent economist, Oliver Hart.

When an employment contract is incomplete, who decides what happens? Who decides on the division of the organisation’s surpluses, pay rises for staff, promotions, changes in working conditions, training opportunities, on dispute resolution? This is where the issue of manager-staff power relations comes in. The managers tend to have the “residual control rights”, or final say, when contracts are incomplete.

Germany should not be presented as a utopia for workers. Yet it is a place where, through its practice of employees being represented on companies’ supervisory boards and its norms of “codetermination”, the forms of managers’ proclamations of respect for workers and the substance of that relationship are markedly closer than they are here. Germany has a developed at least a partial institutional solution to the inequality of power that stems from incomplete contracts.

If we truly desire the substance, not just the forms, of a harmonious and mutually respectful workplace, we should learn from that.

#codetermination #incompletecontracts #OliverHart #RonaldCoase