From 1st January 2019, the revised UK Corporate Governance Code drawn up last summer by the FRC will come into force. The major change on previous years relates to the requirement for firms to establish formal mechanisms for employee voice to be heard at the boardroom level. While formally the code applies only to those companies with a premium listing on the London Stock Exchange, in practice we would suggest the code should be seen as a model of good practice in corporate governance for all large and medium sized companies across the UK. The new Code states:
FRC UK Corporate Governance Code
These three methods are broadly based around the three models outlined under corporate governance reform plans in the Conservative Party manifesto in 2017. The options are, unsurprisingly, broad and flexible, allowing a very wide range of interpretation by individual firms in terms of how they are implemented. This presents both an opportunity and a risk. While the IPA would not claim that any of the three options; worker directors, a workforce advisory panel, or a designated NED; was inherently superior to the others, it is clear that there are ways of complying with the letter of the code that involve doing very little in practice.
Simply designating a non-executive director to be responsible for listening to the workforce, but setting up no other mechanisms to actually collect worker voice or open an informed dialogue with the workforce, is going to lead to a very selective and minimal worker voice being represented at best. Similarly if a random member of the workforce is simply selected by management and appointed to the board, without any kind of election from the workforce or other means by which that worker can actually represent the views of the workforce more broadly, they will improve board diversity, but do little to actually improve employee voice.
On the other hand, a company that really wanted to seize this opportunity to bring a meaningful employee voice to their boardroom could use a combination of the suggested options, perhaps having an elected employee director or designated non-executive director who also acted as chair of an employee advisory panel that was itself elected by the workforce.
At the same time, a separate regulatory change that could have far-reaching consequences is coming down the line. The government announced shortly before Christmas that, in their response to the Matthew Taylor Review of Modern Employment Practices, they would be bringing forward legislation to amend the Information and Consultation of Employees Regulations first brought in back in 2004. Under the changes, the proportion of the workforce that would need to make a request to set up formal information and consultation arrangements will be lowered from 10% to 2% of employees (with a minimum of 15 employees).
This small change could lead to a huge increase in demands for formal consultation mechanisms to be set up under the regulations; finding 20 employees willing to support such a request in a 1,000 person company will be a far easier hurdle to jump than finding 100 such employees. Given that one of the best ways for companies to protect against having mechanisms imposed on them against their will is to act preemptively to set up a pre-existing information and consultation arrangement with the agreement of the workforce, wise firms will have yet another reason to act now in overhauling their employee voice arrangements.
Given the potentially enormous benefits of having an informed employee voice, in terms of productivity, creativity, more long-term thinking, better industrial relations and organisational resilience to weather storms such as Brexit, firms should be jumping at the opportunity these two sets of changes offer and trying to set up new voice arrangements that will stand the test of time; not just looking for the quickest solution that will satisfy the letter of the law. IPA stands ready to support and advise any firms looking at ways to establish or improve employee voice mechanisms, through consultation, managing ballots for employee elections and providing training to new staff representatives.
Patrick Brione is Head of Policy & Research at IPA
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