Should your board include a representative from the workforce?

Posted by Aura Toader on 9 July 2019
Aura Toader

In 2016, during her campaign for the leadership of the Conservative Party, Theresa May spoke about “making Britain a country that works for everyone, not just the privileged few”. To achieve this, she proposed requiring listed companies to appoint employee representatives on the board. Soon after, in what was commonly referred to as a U-turn, the prime ministry published a green paper for consultation with businesses over what is the best way for increased employee engagement, shifting away from mandatory appointment of workers on boards.

The green paper provided three options:

  • The establishment of stakeholder advisory panels
  • Delegating responsibilities to a non-executive director ("NED") to engage with employees and other interest groups
  • Appointing a representative of the workforce to the board

The Confederation of British Industry (“CBI”) responded by advocating for an approach that would give companies flexibility in deciding what method would be more suitable for their business model. The Government stressed once more the need for strengthening the voice of employees in board decisions but watered down its initial proposal and did not force companies to put workers on boards.  Following on from these discussions, the FRC published a new Corporate Governance Code in July 2018, which includes a provision requiring companies to adopt one of the three options mentioned above for engaging with employees on a comply or explain basis.

It is unlikely that companies would choose to appoint a worker representative on their boards rather than establishing an advisory panel or delegating employee engagement responsibilities to an independent NED. According to a survey conducted by ICSA in October 2018, “70% of companies oppose the idea of workers on boards”. At the same time, looking at the largest FTSE 100 companies, several already announced the establishment of a Workforce Engagement Director. The pharmaceutical giant GlaxoSmithKline delegated Vivienne Cox, a non-executive director, the responsibility of engaging with employees in December 2018. Marike van Lier Lels took on this role at RELX plc in January 2019.

Theresa May is not the first British prime minister to advocate for greater employee engagement. During his tenure as prime minister in the 1970s, James Callaghan supported the idea of both employee and shareholder representatives on the boards of companies with over 2,000 employees. Despite strong support from the prime minister and the leader of the Trades Union Congress (“TUC”), the CBI opposed it.

Having workers on boards is not a radical idea outside the UK. Thirteen European countries, including those who also have a unitary board structure such as Sweden, give workers the right to be represented on company boards. An employee survey analysis shows that "when employees have confidence in the board, they are nine times more likely to be engaged in their work and committed to the organisation".

The main argument in favour of labour participation in governance is that employees make significant firm-specific investments and are therefore exposed to significant risks. In particular, an adverse change in company performance can represent a bigger downside risk to employees than to shareholders, who can minimise their exposure to a specific investment through diversification. The representation of employees could therefore encourage boards to prioritise a long-term view in decision making, in addition to increasing diversity, reducing “groupthink”, and improving the flow of information within the organisation.

“The representation of employees could encourage boards to prioritise a long-term view in decision making, in addition to increasing diversity, reducing “groupthink”, and improving the flow of information within the organisation.”

Having an employee director on the remuneration committee might lead to a more even wealth distribution within the organisation. Ideally, an increase in the bonuses for top executives would correlate with an increase in workers’ pay. In reality, rising CEO and top executive pay sits alongside unchanged earnings for the wider workerforce. 

But businesses voiced concerns on worker representation at board level.  One of these concerns is that one director cannot be representative of a global workforce. Others believe that companies owe allegiance to shareholders only, and having employee representatives on the board with diverging interests from those of shareholders would not allow for the maximization of shareholder value. Finally, some businesses argue that the unitary board structure at UK banks would make it impossible to have employee directors.

Appointing an employee representative is not a panacea but it does seem to contribute to more fairness within the company. With this in mind, boards should choose the best means to achieve the government’s goal of strengthening the voice of employees, rather than choosing the simple option to tick the compliance box.

 

Endnotes:


[i] Prime Minister's Office (2016). Statement from the new Prime Minister Theresa May. Available at: https://www.gov.uk/government/speeches/statement-from-the-new-prime-minister-theresa-may

[ii] Department for Business, Energy & Industrial Strategy (2016). Green Paper on Corporate Governance Report. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/584013/corporate-governance-reform-green-paper.pdf

[iii] Financial Reporting Council (2018). The UK Corporate Governance Code. Available at: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf 

[iv] ICSA (2018). 70% of companies oppose the idea of workers on boards, new poll finds. [online] Available at: https://www.icsa.org.uk/about-us/press-office/news-releases/70-of-companies-oppose-the-idea-of-workers-on-boards-new-poll-finds [Accessed 8 Jul. 2019]. 

[v] Effectory (2015). The role of senior management in employee engagement. [online] Available at: https://www.effectory.com/knowledge/blog/role-of-senior-management-in-employee-engagement/ [Accessed 8 Jul. 2019].

 


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