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Employee directors

Theresa May, during her conservative party leadership election campaign, proposed the introduction of compulsory employee representatives to quoted companies’ boards. The proposal was short lived and Theresa May has since revised proposals to make workers councils voluntary. How would worker representatives fair on UK boards? We investigate.

Employee directors – the proposal

Theresa May sees the following problems:

  • Excessive executive remuneration;
  • Lack of accountability;
  • Cliques of directors;
  • Lack of diversity.

There was a need to:

  • Tame executive excess;
  • Improve board-worker communication.

Her board reform proposals were taken from the German corporate governance model. Her chief proposal required worker representation on quoted company boards. The proposal has had a U turn as Theresa May no longer thinks the German model works for most UK companies.

The European experience

The position abroad is as follows.

Germany

In 1972, Germany standardised the law for one third employees on company boards with over 500 staff. It is widely believed that a diverse board is a successful board. Trade unionists:

  • Bring a grass roots perspective;
  • Promote a stable long-term strategy.

However, critics say trade unionists:

  • Support the status quo;
  • Promote conservative attitudes;
  • Undermine efficient decision making.

Studies suggest workers’ influence on European boards is mixed, e.g.

France

In France, employee representation is compulsory in the public sector. However, the exercise of real influence on the board is rarely reported.

Spain

Spanish trade unions report that for companies with worker board representatives, often worker communication did not improve, and sometimes deteriorated.

Finland

Some observers of Finnish workplaces see improved communication with worker representation on the board.

Trade unionist vs non-executive director

According to the UK Corporate Governance Code at least half the board should comprise independent non-executive directors.  Theoretically, this strengthens executive oversight, and reduces short-termism.

Reasons for the failure of some NEDs

In practice non-executive directors often fail. Typical reasons are:

  • Barely know the companies they oversee;
  • Fail to challenge outrageous business decisions.

The problem is that non-executive directors oversee the people who appoint and dismiss them. Thus non-executive directors may be drawn from the same social circles, since directors presumably prefer to work with friends rather than strangers.

Are worker representatives any better?

Nevertheless, worker representatives may be no better at challenging board decisions. The union voice may be faint. After all, the balance of power is skewed. The longer the worker serves on the board, the greater the sense of “board camaraderie”.

There are alternatives. In Scandinavia, shareholders directly choose non-executive directors. MP Chris Philp proposed this in parliament. Theresa May has not replied. Her new proposal to make worker representatives voluntary does nothing but supports status quo.

Quite possibly, Theresa May’s threat of board level workers was just to force non-executive directors to pull their socks up.

Can directors adequately protect employees’ interests?

Directors’ duties are laid out under the Companies Act. The BEIS Green Paper suggests that directors’ duties extend to protecting employee interests. If the suggestion is true, it would, in principle, be possible for employees to sue a director for a breach of directors’ duties. A very tempting prospect for the BHS employees.

The suggestion is noble but dumbfounded. First and foremost, the directors owe a duty to the company to promote its success for the benefit of the shareholders. In doing so they must consider the interests of employees but they ultimately are non-partisan.  This means that directors do not represent any interest group other than shareholders as a whole. Recognising employee interests is by law, secondary to the protection of company’s interests.

Any change requires amendment to the Companies Act which is not so far proposed.  Without explicit legislative change there is nothing in the statute to make directors accountable to employees.

Employee shareholders

Companies operating employee share schemes are more profitable than those without such schemes, according to Government statistics. The results need some balance as probably companies breaking even, with poor growth prospects, probably don’t offer employees worthless incentives.

Thus employee shares or share options, e.g. EMI are proven employee incentive tools. The schemes attract tax breaks, and adoption increases.  These schemes help align management and employee interests.

Employee directors’ impact on UK boards

The European experience of board level worker representation suggests that worker representation is not the way forward. With workers on boards, even if voluntary, it is probable that:

  • Board-worker communication won’t improve;
  • Employee relations won’t improve;
  • The business won’t improve.

Current UK law allows voluntary worker representation on boards already. Adoption is low.

Major UK company shareholders

UK individuals own around 12% of quoted UK shares by value. What the statistical office terms “rest of the world ownership” accounts for 54%.  Unit trusts: 9%, other financial institutions: 7%; insurance companies: 6% and pension funds: 3% are the major institutional owners.

These institutions pressure companies to deliver returns – either capital growth or dividends, at the expense of employees.  Board level worker representation will not ameliorate this pressure.

Conclusion

Thus companies with employee shareholders or option holders may be more successful than companies with board level worker representation.

Employee share schemes and the John Lewis model may work. We would suggest Theresa May promotes share schemes, especially in the regions where uptake is low.

Catherine Gannon is the managing partner for Gannons charged with promoting the interests of all of the firm’s clients. 

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