There is an emerging consensus that the UK corporate governance regime is tilted too far towards the interests of capital, and away from the interests of labour. The dominant ‘shareholder value’ model, with its emphasis on using corporate profits for share buybacks and returning dividends to investors, has a systemic bias towards value extraction rather than value creation, and acts as a barrier to the promotion of internal, long-term re-investment in human and physical capital, productive capacity, and R&D[1]. Strongly embedded incentives for asset holders and corporate executives create powerful tendencies towards short-termism in both finance and industry.

Whilst shareholders can vote on who sits on the board and make other strategic decisions, and directors have a legal duty (under Section 172 of the Companies Act) to promote their interests, by contrast the interests of employees remain secondary. Unlike in other European countries, most UK employees are excluded from representation on company boards, and have almost no formal rights to information or involvement in corporate decision-making. Moreover, whilst shareholders can spread or hedge their risk through increasingly diversified portfolios, workers bear long-term firm-specific risks in companies. The question remains how far these imbalances can be addressed through corporate governance reform.

An increasing range of voices, from across the political spectrum, are now openly advocating for change along several dimensions, from the reform of directors’ duties to limitations on shareholder voting rights. One particularly powerful argument is for worker directors. There is widespread evidence that employee voice at board level can increase trust and co-ownership, drive knowledge and insight by bringing a different perspective and information set to the board, encourage employees to feel more empowered and engaged, and foster longer-term management horizons.

A notable aspect of the Prime Minister’s stated agenda upon taking office, though since then significantly watered down, was around workers on boards. Following a green paper consultation and a select committee enquiry, in August 2017 the government published its response[2], which included inviting the Financial Reporting Council to revise the UK Corporate Governance Code to include a new requirement for companies to adopt, on the Code’s ‘comply or explain’ basis, one of three mechanisms for strengthening employee voice: (i) a designated existing non-executive director (NED), (ii) a formal employee advisory council, or (iii) a director from the workforce. These new requirements came into effect in January 2019. The change in the Code is significant as, for the first time in its existence, the text recognises the importance of the workforce. Firms will currently be considering their responses.

The latest picture suggests there are now five UK-listed companies with employees in their board structures: First Group, Capita, Mears Group, Sports Direct, and TUI. The latter firm is listed in the UK (and in the FTSE100), but incorporated in Germany, and hence has a supervisory board with half employee representatives. Capita is an interesting case as it has appointed two employee directors, following an extensive recruitment process, and so is the first UK PLC to have multiple reps. The two worker directors – Lyndsay Browne (a chartered accountant) and Joseph Murphy (a civil engineer) – have been appointed for three years. They will each act as full, independent directors, with the same responsibilities as other board members, and will be paid £64k on top of their current salaries.

Evidence suggests that far more firms, however, are taking the route of designating an existing NED to represent employees: those announced so far include Diageo, Hays, Legal and General, McKay Securities, and Ted Baker. A recent LAPFF report in May 2019 confirms this. Almost three quarters (73%) of companies surveyed by LAPFF that have decided how to comply with the revised Code said they would appoint a designated NED. Just 5% said they would appoint a director from the workforce, while 27% have opted for a workforce advisory panel. The most common reason given for rejecting a worker director was the size of the workforce. Some companies said their workforces were too small, while larger companies questioned how one person could represent a global workforce.

Clearly the NED route is a weaker option, and some critics have suggested that, far from embedding effective worker voice at board level, this can amount to little more than a PR exercise. The TUC and the bigger trade unions are pressing for more rigorous responses, and stressing the need for independent worker directors who are elected by the workforce, and not chosen by management[3]. Responding to the LAPFF survey, the acting chair Cllr Paul Doughty said: ‘The results are rather disappointing. Although it is welcome that many boards are identifying a director who will be responsible for workforce engagement, it is surprising that so few companies are choosing to appoint an employee director. This feels like a missed opportunity’[4].

All the major UK political parties have made manifesto commitments to workers on boards in different forms. The Labour Party has gone the furthest, arguing that workers in large firms should have a third of board seats. This sits alongside other Labour proposals including: large listed firms transferring 10% of shares to an ownership fund supervised by employee trustees; allowing workers and customers binding votes on executive pay packages; and a six month minimum share holding to vote in takeovers. Commenting recently on the Capita initiative, Vince Cable, leader of the Liberal Democrats, argues that worker directors can ‘add a fresh perspective based on experience of how the company actually operates on the ground… Workers on boards is far from being a panacea, but it is a useful antidote to the current poisonous sense of distrust and malaise hanging over many of our big companies’[5]. As the tectonic plates of British politics continue to shift in the Brexit chaos, other voices are also emerging in support of worker directors. A recent pamphlet written by Chuka Umunna after the formation of the Independent Group of MPs (now Change UK) outlines what a new ‘British model’ of capitalism might look like[6]: this includes workers on boards and remuneration committees, as well as employee ownership trusts, co-determination in workplace decision-making, stronger trade unions, incentives for innovation within firms, long-term financing, and a National Investment Bank.

Some of the policy proposals in this area are being informed by a series of new ideas emerging from left-of-centre think tanks. The latest, Common Wealth, was launched in April 2019, and stresses the need to develop new ownership and stewardship structures as an essential part of a more democratic and sustainable economy, with one key strand of this work relating to ‘transforming ownership and governance of the corporation’[7]. The longer-established IPPR has advanced similar arguments in the final report of its Commission on Economic Justice, proposing that large companies of more than 250 employees should have at least two workers, elected by the workforce, on both their main board and the remuneration committee, as something ‘likely to enhance the quality of strategic decision-making, increase the diversity of opinion and experience on the board, represent employees’ interests, and strengthen employee engagement’[8].

Support for the principle of worker directors is not solely the preserve of our more progressive politicians and think-tanks, but is increasingly mainstream. Andy Haldane, Chief Economist at the Bank of England, has suggested that current company law gives too much weight to the interests of shareholders, and has argued that putting workers on boards and making directors consider the interests of all stakeholders, including ‘wider society’, could be economically beneficial[9]. The last major debate about worker directors in the UK was in 1977, when the Committee of Inquiry on Industrial Democracy (the Bullock Committee) proposed measures for worker directors in all UK-based companies. The Conservative government elected in 1979 abolished existing worker director schemes and undermined further progress in the area for a generation, but, as one academic assessment of board-level employee representation across Europe notes, ‘after 40 years, BLER has re-emerged as a significant issue on the UK political agenda’[10]. Whilst at the start of 2018 there was only one PLC – First Group – with an employee director, by the end of 2019 there will be at least five. This is slow progress, but the direction of travel seems set[11]. Recent polling by YouGov suggests that the principle of workers on boards is supported by about two-thirds of the population in the UK. The current government has made only tepid efforts at reform, and the ‘comply or explain’ principle makes it all too easy for firms to ignore initiatives they don’t like, but it seems unlikely that public policy will stand still in this area, as we witness increasing calls for stronger and more enforceable employee participation in corporate governance structures.

Chris Rees is Professor of Employment Relations at Royal Holloway, University of London

[email protected] 

References

[1] Mazzucato, M. (2018) The Value of Everything: Making and Taking in the Global Economy, London: Allen Lane.

[2] BEIS (2017) Corporate Governance Reform: The Government Response to the Green Paper Consultation, London: Department for Business, Energy and Industrial Strategy.

[3] TUC (2016) All Aboard: Making Worker Representation On Company Boards a Reality, London: Trades Union Congress.

[4] LAPFF (2019) Employees On Boards: Modernising Governance, London: Local Authority Pension Fund Forum.

[5] Cable, V. (2019) ‘Could Capita’s move to put workers on boards fix capitalism’s crisis?’, City AM, 14^th May.

[6] Umunna, C. (2019) What Are Progressives For?, London: Progressive Centre UK.

[7] Common Wealth (2019) Owning The Future: Toward The Democratic Economy.

[8] Institute for Public Policy Research (2018) Prosperity and Justice: A Plan For The New Economy.

[9] Strauss, D. (2018) ‘Andy Haldane calls for corporate governance reform’, Financial Times, 27^th September.

[10] Gold, M. and Waddington, J. (2019) ‘Board-level employee representation in Europe: State of play’, European Journal of Industrial Relations, published online 21^st February.

[11] Tom Powdrill’s blog - http://labourandcapital.blogspot.com/