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Theresa May: unexpected champion of employee board members

Stephen Davis and Jon Lukomnik | August 26, 2016

Shrewd governance professionals always want reliable reconnaissance so that they can help U.S. boards avoid surprises, investor challenges, or activist attacks. One of the most prized skills of the job is knowledge of where to find such intelligence. We like to think the bodies for which we work—the IRRC Institute and the Harvard Program on Corporate Governance—offer such insight through research and roundtables. But there’s another place to look, too, and it has proven uncannily accurate: the United Kingdom. Governance developments there have a habit of migrating before long to North America. The exact form may change, but the basics remain as they cross the Atlantic. Among now-common U.S. governance practices that originated in the United Kingdom are “say on pay” votes, majority voting standards for director elections, and independent board chairs. So should it be worrying to U.S. companies that the newest governance goalpost in the United Kingdom—touted by none other than the country’s Conservative Party prime minister—is the appointment of workers to corporate boards?

The idea of a Conservative government even contemplating such a notion would once have been dismissed out of hand as outlandish—say, through the party’s 338-year history until July. Sure, the opposition Labour party had included such an idea in its platform for the 2015 general election, from which it emerged so devastated that the manifesto was later compared to its hard-core 1983 platform, famously dubbed “the longest suicide note in history.” In retrospect, though, Labour was comparatively restrained in 2015 compared to new Prime Minister Theresa May’s proposal. Labour only had pledged to “make sure employees have a voice when executive pay is set by requiring employee representation on remuneration committees.” Critics poured scorn on this worker-director plank as hopelessly leftist. But on July 11, then-Home Secretary May opened her brief campaign to become Conservative leader and prime minister with a speech in Birmingham in which she dropped a bombshell. “If I’m prime minister,” she declared, “we’re going to have not just consumers represented on company boards, but workers as well.” Notice that she promised workers on corporate boards not just for compensation committees, as Labour had proposed, but for everything a board does. Two days later May won the top job. Now she faces the challenge of cementing that promise into U.K. public policy. Or of walking it back.

No one seems to know just where May’s workers-on-boards proposal originated. It certainly came as a shock to parliamentarians of all stripes as well as to the business, investor, labor, and media pundit communities. But May appeared to have surfaced the pledge in reaction to the surprise U.K. referendum to exit the European Union. She believed that outcome signaled acute public resentment not just of Europe, but of globalization, growing income inequality, and the sway and swagger of big business. Some analysts contend that a comparable mixture fueled support for Donald Trump’s and Bernie Sanders’s campaigns for president in the United States. May seems to have calculated that offering her startling workers-on-boards proposal, so utterly against the character of the Conservative Party, would broadcast an emphatic “message received” to angry voters. Moreover, in May’s calculus, forcing corporate boards to be more open would, in effect, help them to save themselves from mounting public hostility.

What comes next to implement the measure could have a big effect on whether the worker-director initiative joins the parade of U.K. governance steps that gain traction outside Britain, including in the United States.

May hasn’t yet declared her intentions. But there are multiple ways forward to overhaul British corporate boards. One route—perhaps least likely to cross the Atlantic—would be to revise Company Law to require a certain universe of listed companies to include one or more employee representatives on their boards.

If a grand, private-sector U.K. experiment succeeds through promoting employee-directors in making boards seem more responsive, we could imagine companies and investors here giving workers’ concerns more board attention.

Going the parliamentary action route would likely stoke controversy within the Conservative Party, though it could rally Labour and other opposition lawmakers. And it would take a long time, perhaps more than two years, to roll out, given the press of other matters (not least Brexit consequences). But another option is available, and it is both speedier and more flexible.

Ever since Sir Adrian Cadbury pioneered the “comply or explain” formula in his now-celebrated 1992 Report on the Financial Aspects of Corporate Governance, Britain has favored this voluntary approach to board reform. Today, the Financial Reporting Council (FRC) oversees the U.K. corporate governance and stewardship codes, each of which relies not on law, but on “comply or explain”, to function. Periodically these codes are, in turn, updated with guidance developed by non-governmental, multi-stakeholder advisory bodies. Case in point: Lord Davies’s 2010 report promoting women on British corporate boards resulted in the FRC adopting diversity disclosure principles in the U.K. Corporate Governance Code.

Our bet is that May will opt for this voluntary approach over law. We can imagine her naming a multi-stakeholder, private-sector-driven, Lord Davies-style review into best steps to open corporate boards to consumer and employee members. Such an inquiry would presumably dive into questions about the appointment process and duties. And it might recommend goals akin to how Lord Davies set 25 percent as the target for the percentage of board seats held by women by 2015. Such an initiative would not follow German practice, we forecast, in empowering trade unions to select worker-directors. Instead, it will likely ask board nomination committees to develop their own procedures to search for and add an employee director for election by shareholders. We would then expect the FRC to respond with a fresh “comply or explain” principle in the U.K. Corporate Governance Code that would press companies to disclose how they go about identifying worker-directors, or perhaps take a softer approach of simply asking firms to explain how worker and consumer concerns are considered at the board level.

So far in Britain, after the initial shock, public reaction to the prime minister’s worker-director idea has been muted. For instance, an HSBC Global Research report by Robert Walker and Charanjit Singh concluded, “We believe the biggest benefit of employee representation on U.K. boards is that it would ensure employee issues have a clear voice at board level and could act as an additional check on the perceived rising inequality in the U.K.” The Institute of Directors wants any such proposal to be voluntary, while the Confederation of British Industry (CBI) declared through apparent gritted teeth that proposals should be a matter for discussion among business and government leaders. Private reactions are a different matter. Wrote the Guardian’s Nils Pratley: “Workers on boards? Expect company chairmen to splutter on their after-dinner brandies at the CBI’s next black-tie bash.”

In the United States, despite widespread grassroots antagonism toward Wall Street, it is almost impossible to imagine White House and congressional support for legislation or regulation to force public companies to install employee-directors. But if a grand, private-sector U.K. experiment succeeds through promoting employee-directors in making boards seem more responsive, we could imagine companies and investors here giving workers’ concerns more board attention. There may be sound business reasons to do so: A review by Harvard’s Labor and Worklife Program and the IRRC Institute found that 67 of 92 academic studies detected a positive correlation between human capital management and financial performance, while 24 had mixed or no correlations and only one had a negative correlation.

Whether board-level attention to worker issues would extend to workers actually sitting on corporate boards is an open question. While there are scattered examples of workers sitting on U.S. corporate boards—today, General Motors’ board features a retired vice president of the United Auto Workers—U.S. companies tend to dislike “constituency” directors, or board members placed in office seemingly to look after specific interests. That being said, boards are already searching for ways to break through public distrust as well as for ways to increase diversity among directors. Expanding the pool of potential directors to workers could be one way to accomplish both goals.

Governance trends, of course, don’t always flow one way. Prime Minister May has already committed, with some relish, to importing the Dodd-Frank rule on pay ratio disclosure. But keep an eye on the U.K.’s new concentration on worker issues at the board level; it could be a bellwether of governance change on this side of the Atlantic.