“…if I’m prime Minister, we’re going to… have not just consumers represented on company boards but employees as well” (Theresa May, July 11, 2016). One part of that statement has already come true – Mrs May is now Prime Minister, but the other two – are these serious commitments or examples of those promises which you know from the very outset to be unfulfillable, like manifesto promises or the Southern Rail emergency timetable? That employees should be represented on company boards, as much as it reads as a throwaway comment, is in fact a very big and bold statement and would represent a sharp reversal of the traditional Conservative approach to industrial relations.
It is true that EU countries including Austria, Denmark, Germany, Norway and Sweden have well-established systems for employee representation on boards, in many cases enshrined in statute. In Germany, for example, companies with over 500 employees are likely to have 1/3 of the supervisory board elected by the workforce. But the UK is not Germany and its corporate governance traditions and structures are very different from ours. Germany’s essentially began again in 1945 but British industrial relations, attitudes and practices go back uninterrupted much further than that.
Let’s firstly suppose that Theresa May intends to see this statement made a reality. The suggestion poses some important questions which would go to the heart of the structure and functioning of the UK’s system of corporate governance: how could the Government enforce the representation of employees on boards? What form would the employee representation take? What level of involvement would the employee representatives have in company decision-making – surely not as far as any form of co-determination or veto? What will the representatives’ remit be – will it be confined to workforce issues or could it extend to commentary on the executive management? From which part of the workforce might the employee representatives be drawn – management roles or blue-collar workers?
Would being “on the Board” mean being a statutory director? And if so, how much take-up would there be for a role which carried all of the personal exposures of being a director without the corresponding executive remuneration package?
What about confidential discussions about decisions affecting the workforce? For example, a downturn in the company’s performance leading to potential redundancies – does it make sense for the employee representatives to be party to or even present at these such discussions? This problem is circumvented in a two-tier board system such as that used in Germany where employees only sit on the supervisory, and not the management board. This gives the other “proper” directors the chance to discuss these issues in a confidential forum. Though do note that Sweden has a unitary board system similar to that of the UK.
The most common (though not best) argument for employee representation seems to be that it could help to keep executive remuneration in check – although query whether it would be appropriate for employee representatives to sit on Remuneration Committees given that the non-executive directors who usually chair these are independent anyway and their remit is to act in the best interests of the company as a whole. It seems almost inevitable that an employee representative on a remuneration committee would think and vote with the interest of the employees as a priority. Other, perhaps more measured and sensible, arguments for employee representation on boards are that they will bring first-hand operational knowledge to board decision-making, give the workforce an effective and respected voice and thereby improve the management and ultimately the profitability of the company. Even if that voice is not determinative of anything and is ultimately not needed, it must surely be worth hearing in the first place, say supporters.
However, the arguments against employee representation on boards are also strong: the executive needs a forum in which it can discuss strategy, plans and forecasts without the risk of information leaking to the wider workforce. The presence of employees on boards in other European countries is part of very different traditions and practices of corporate governance. A quick Google search will show you that probably the most well-known employee board representative in the UK is First Group PLC’s employee director. However, some further delving reveals that this post is elected by shareholders and not by the employees in any case. The fact that other major companies have not so far followed suit and voluntarily introduced their own employee directors suggests that this is not seen to be a consistently productive or desirable outcome.
One thing, perhaps only one thing, seems certain – that legislation to compel employee representation on UK boards would be complicated, uncertain and bitterly contested throughout its passage into law. You cannot hope to legislate away the mutual suspicion and antipathy of generations just like that.
It therefore remains to be seen whether anything will actually be done to act on Mrs May’s comment (you’d think the Government had enough to be thinking about with Brexit), so watch this space for further developments.