As with the new Prime Minister’s interest in the resurgence of grammar schools, her proposed introduction of elected employee representatives in the boardroom (perhaps surprisingly) had a decidedly retro feel about it. But unlike grammar schools, this was certainly not a rehash of former Tory policies; the concept of elected employee board members was lifted straight out of the playbook of the Labour party. And in a further echo of events of forty years ago the idea now seems to have died a death for reasons very similar to those that led to the policy's original demise.
As some, including the writer (and presumably the Prime Minister), will recall, Harold Wilson’s Labour Government floated the idea in 1975. The response was not universally in favour and in true “Yes Minister” style, a Committee of Inquiry was appointed under Sir Alan Bullock “to advise on questions relating to representation at board level in the private sector.”
The exercise was not an unqualified success. The Inquiry eventually endorsed the concept of elected employee board members, as did the TUC. But employers – notably the CBI – were implacably opposed to it, individual unions squabbled and the Report of the Inquiry – published in January 1977 – contained both a “main report” and a “minority report” from the representatives of industry on the panel. The Government (by now under Jim Callaghan) dithered about the implications of introducing such radical changes in the teeth of such opposition and against a background of a worsening economy; the Social Contract soon broke down, and the concept of elected employee board representatives perished with it. In two years the Government itself fell as the Tories swept to power under Margaret Thatcher in 1979. So what changed to persuade a Tory Prime Minister to return to an apparently failed Labour experiment and are there lessons to be learned 40 years down the line?
The 1970s landscape
The events of the mid 1970s bore a number of similarities to those of the current time. A referendum on European membership had just been held (albeit the outcome was different), there was economic turbulence, there was widespread concern that those running the largest businesses had become elitist and remote from the communities in which they operated and the people they employed. And the English football team was rubbish.
But there were key differences. The industrial landscape was both polarised and adversarial and the trade unions wielded very considerable industrial muscle. Big beasts in the union world like Jack Jones, Hugh Scanlon and Clive Jenkins prowled around the corridors of power seeking out the best beer and sandwiches on offer. When the former Tory prime minister, Edward Heath, famously asked the electorate to decide in 1974 who should run the country in the wake of the chaos caused by the miners’ strike and the ensuing three day week, his defeat naturally gave the trade union movement even greater power. The Labour victor in that election, Harold Wilson, felt it necessary to institutionalise their power by entering into a “Social Contract” with the trade unions to secure wage restraint and the proposal to introduce employee board members into large companies was part of the (very considerable) quid pro quo.
The Bullock report
The Bullock committee reflected the dominance of the trade unions in its terms of reference. These referred to the “[accepted] need for a radical extension of industrial democracy in the control of companies by means of representation on boards of directors and the essential role of trade union organisations in this process.” The main report reinforced this sentiment in various places. One passage was particularly striking to a reader 40 years on, the report noting that "[the] policy of successive governments over….the last 10 years has been to encourage and strengthen trade unionism and the collective bargaining which makes it possible." This therefore made it imperative for the Committee that "any system of board representation must have trade union support."
Similarly, the chosen channel of representation for employee board representatives had to be via the trade unions as this was seen as a natural and desirable extension of the system of collective bargaining. The Committee was not troubled by the fact that it made no special provision for non-unionised employees in its Report; in effect that was deemed to be their own problem for not organising themselves collectively, and the Committee considered that nearly all the large companies covered by the proposal were unionised anyway so there was no need to do so. And in a rather sinister coda, the Committee also observed – with events of 1974 obviously very much in mind - that unless employees were properly represented in the boardroom they could choose to oppose measures they didn’t favour by a return to mass industrial action.
In a nod to Britain's (then nascent) membership of what was then the European Economic Community the Committee pointed out that eight EEC member countries had worker board representatives, that this arrangement seemed to work well, and that the EEC actually wanted to extend employee participation in management decisions via proposals for European Works Councils. So if it worked well for them, it must follow that it would also work well for Britain.
Despite all this, the Bullock proposals were unacceptable to a number of unions. The EEPTU, for instance, saw the proposals not as an extension of collective bargaining but as being in conflict with it. For them "the job of trade unions [was] to consider, contest and oppose if necessary the exercise of management prerogatives." Other unions followed suit and thought that it was inevitable that employee board representatives would quickly become management stooges and lose the links to their constituents.
Employers, perhaps unsurprisingly (given the institutionalised role of the unions) were more or less unanimously opposed to the proposals. The CBI's official position was a voluntarist approach; there should be no compulsory obligation to have employee participation on boards and employers and employees should decide between themselves. Employers felt that there needed to be an effective sub-stratum of employee participation below board level before employees could operate effectively as board members. They were concerned that employee representatives would have divided loyalty as they would only act in the interests of their own constituents and not the interests of the company as a whole. Similarly, they would not respect the confidentiality of what could sometimes be highly confidential information provided to board members as they would be expected to report back to their (union) constituency. Efficiency of decision making, they claimed, would be impaired. Above all they felt that the proposal was an unwarranted attack on the prerogative of shareholders' ultimate ownership of the companies.
The Committee made clear its view that none of the objections registered by either the employers or disaffected unions were insurmountable. Buoyed by the clear support from Jack Jones, the Committee asserted that there was no conflict at all between employee board representatives and the system of collective bargaining; the two were complementary processes. It was similarly dismissive of the arguments made on behalf of the employers. Similarly buoyed by what it saw as the success of employee board representatives in West Germany and Sweden, it concluded that none of the issues raised had been an insuperable problem in either jurisdiction; employee board representatives would have just as much incentive as other board members to act in the company's best interests, and protocols could be developed in tandem with the unions to work out how much – and what types of – confidential information could be disclosed when reporting back. And far from being inefficient, the decision-making process would be enhanced as decisions would be taken with employee buy-in, thereby lessening considerably the prospect of industrial strife.
As for the alleged attack on shareholders' management prerogative, the Committee was particularly scathing, observing that "[members] of the board are largely free to run the company as they wish. Shareholders are too numerous to act effectively as a body and have acquiesced in control by the board."
40 years on
Ultimately the Committee's proposals were seen as too radical and were quietly dropped. So why did the Prime Minister put forward a similar proposal and not learn the lessons of forty years ago? After all, Margaret Thatcher was a champion of employee share ownership, but even she shied away from employee directors.
Various arguments could be advanced in favour of the proposal. The industrial landscape is far less polarised and the proposal had a more positive rationale than the mere will to avoid more industrial strife. And the very substratum of employee involvement in the running of businesses that the CBI and employers thought was lacking 40 years ago can now be seen to exist via the operation of European and domestic works councils by a number of leading multi-nationals.
Frances O'Grady quickly announced the support of the TUC in principle for the idea. Cynics would say that, given consistently falling trade union membership, the proposal was manna from heaven. But what about the CBI and other employer groups? Carolyn Fairburn – the Director-General of the CBI – almost audibly choked on her breakfast cereal when asked about the proposal on a Sunday morning on the Five Live Pienaar on Politics programme, which didn’t bode well.
Not only is the industrial landscape very different now from what it was in the mid-1970's. Company law and corporate governance have also moved on and a pretty decent argument can be made that this all rendered the proposal unnecessary. Collective bargaining is considerably less prevalent in the private sector than was the case 40 years ago and industrial strife (Southern Trains excepted) is largely a thing of the past. Directors now have a statutory duty to take into account the interests of employees when making their decisions. Employee representatives now have a voice in assessing the impact of UK takeovers. Shareholders are no longer the disinterested and disparate collection of greedy toffs parodied by Bullock and now exercise real influence in the boardroom, particularly over executive pay. Companies are exhorted to champion diversity in the boardroom; do they really need this additional distraction?
And are there really cogent answers to all the arguments previously put forward by the CBI to Bullock? Can employee directors really be expected to keep confidential price sensitive details of a takeover bid or merger proposal which could have widespread ramifications for employee numbers? After all, even in the European legislation providing for European and UK Works Councils companies are allowed to withhold disclosure of certain classes of information from employee representatives (who are bound by obligations of confidence) where this could be particularly harmful to the business.
Following predictably robust lobbying from the CBI and other "business" groups, the proposal now appears to have (once again) died a death and the way ahead is now shrouded in mystery. A handful of notable UK corporates, including First Group and Rolls Royce, have admittedly appointed employee directors or have said they are happy to do so. But one wonders whether, despite the continued warm words about employee participation emanating from No.10, a combination of the "Hard Brexit" to which the Prime Minister is now apparently committed, combined with the threatened "hard ball" tactics if the EU do not give the Prime Minister what she wants, may ironically lead us in the opposite direction with the repeal of the works council legislation as part of a bonfire of EU regulations.