Probably the most European of new Conservative Prime Minister Theresa May’s fairly European corporate governance reform proposals is the proposal to have employee/worker representation on the board. It’s a concept unknown outside the European Union, and the United Kingdom is one of the few EU countries that has not yet introduced it.
But the idea was so far off anyone’s governance radar, except for the Trades Union Congress, that the proposal has taken almost everyone else by surprise, including companies, advisers, investors, and proxy advisers.
Oliver Parry, head of corporate governance at the Institute of Directors, said that while the IoD is broadly supportive of the idea of having worker representation on board, it would like to see this as a recommendation rather than a law. “With laws, there is an arbitrary timetable—every board must have a worker representative in 12 months, for example. That’s not right for every company. Besides, there will have to be training, selection, development, contract negotiations, and pay as a board member will impact their salary as a worker, so the process will take time.”
“We think a closer alignment between the top of a company and the bottom could be a good thing,” continued Parry, “and we’d like to see how it works. I would not recommend adopting the German model. I think the supervisory board, in particular, can create conflicts, problems with clarity of direction, and a communications breakdown, as in the Volkswagen emissions scandal.”
Reza Eftekhari, U.K. market director with governance and shareholder services firm Morrow Sodali, said that he felt that it is possible that Theresa May’s focus on governance and her commitment to having worker representatives on boards is likely to address major concerns shown by large parts of the country—shareholder dissatisfaction with underperforming companies, protest votes about excessive CEO pay, public opposition to the same, even the Brexit vote.
“We’ve been speaking with a number of public companies in the United Kingdom about worker representation,” Eftekhari said, “and while in most cases it was not a topic being discussed internally, it is certainly on the agenda for the future. But many questions remain as to how it will be implemented. If it becomes subject to regulation, it is possible that you will see companies proactively introduce a representative prior to the law being introduced, as we witnessed with the mandatory vote on remuneration policy. We also need to see what will be the opinion of major institutional investors and their proxy advisers. We don’t know at this stage what support there is for this idea in this community.”
Like Parry, Eftekhari warned about some of the potential challenges in moving to a “worker-director,” something that was unlikely to happen fast. “The selection process will be the most difficult,” he said, “finding the right person with the right level of skills and knowledge. And there will have to be some sort of rigorous training regime before they take their seat on the board.”
“With laws, there is an arbitrary timetable—every board must have a worker representative in 12 months, for example. That’s not right for every company.”
Oliver Parry, Head of Corporate Governance, Institute of Directors
But Eftekhari noted that placing a worker on the board would not be any kind of panacea for the problems he hypothesised may have been behind Theresa May’s proposals. Much more needs to be done if there are cultural problems and lack of communications between the board and its workforce. “The board’s responsibility is already to make sure that the interests of the investors are protected. If the issue is lack of representation of the workforce, then other structural and cultural issues need to be addressed as well. Having worker representation on its own will not solve these problems where they exist.”
Neither Parry nor Eftekhari would commend any of the other “worker-director” models already in use in Europe, though Eftekhari stopped short of opposing the German model. “Government should look at the different models out there, assess them, and consult with the largest companies before making any decisions as to whether to introduce the requirement or which model to follow.”
According to the OECD’s Corporate Governance Factbook, 10 EU countries have established legal requirements regarding the minimum threshold of worker representation on the board, which varies from one member to half the members of the board, with one-third being the most common. More than twice as many have adopted the practice voluntarily. Outside of Europe, no jurisdiction requires worker representation on the board.
WORKER REPRESENTATION
“The three most studied are the German, French, and Dutch models,” commented Eftekhari. “In Germany, companies with less than 2,000 employees must have worker representatives making up a third of the board. For larger companies, half of the board must be made up of these representatives. In France, it is five worker reps or one third of the board members, depending on the size of the board. It is more complicated in the Netherlands. In companies with greater than €16 million ($17.95 million) of market capitalization and 100 employees based in the Netherlands, the workers’ council has the right to nominate representatives, but these must still be approved by the shareholders.”
There are, of course, alternatives to a code, which encourages compliance, and regulations, which require it, that would apply to all companies. “There are other models,” said Eftekhari, “such as requiring worker representation only on state-owned or majority state-owned companies, but this would leave out large numbers of public and private companies.”
In addition to worker representatives on boards, there is also an appetite for consumer representatives on boards, though not one expressed by May. Eftekhari reacted strongly against this suggestion, saying that his clients would be very unlikely to countenance such an idea and that it presented exponentially larger difficulties than appointing an employee to the board. “There is little appetite for the idea of consumer representatives on board as this would be to appoint someone completely external to the board. Of course, non-executive directors are ‘external,’ but how would they be selected, what qualifications would they be required to have? Companies with large and varied consumer demographics would find it difficult, and in some heavily regulated industries where some information is restricted even to NXDs…even with confidentiality agreements it would create more difficulties.”
Worker representation is very different from customer representation. It doesn’t matter how diverse a board is or how wide a demographic make-up it has, a worker is very unlikely to be proposed as a candidate, so requiring companies to do so—either on an advisory or mandatory basis—would be the only way to extend this representation. On the other hand, if none of the board has any knowledge of the company’s consumer base, it is likely that the company needs to remake its board.
Parry stressed his preference for employee representation to be made part of the U.K. Governance Code rather than as a regulation, noting the success of the comply-or-explain system adopted for many governance issues in the United Kingdom. “I think our system—rather than a stick, we use the carrot—is the best in the world. Obviously, governance can be and will be improved in the United Kingdom, but it would be dangerous to knock it out of hand. The peer pressure environment encourages companies to constantly try to raise their game. There’s the code approach and the Sarbanes-Oxley approach, and I think the code is far superior.”
Parry also felt that differences between the U.K. code approach, as opposed to the U.S. laws and regulations approach were a fundamental symptom of the differences between the two countries. “There is a system of confrontation in the United States, between business and shareholders, between the government and shareholders. Legislation is the only way to overcome that confrontation, but since we don’t have that system in the United Kingdom—we’ve had scandals, yes—the governance code amendments work very well and then you just wait for companies to sign up. Compliance with the code is very high.”
It remains to be seen whether the proposal to have a worker representative on the board of directors was just a campaign promise or whether it should be taken seriously. It could be that May’s staff is already consulting with the likes of BP or the large banks as to how the proposals might be implemented or whether there are alternatives. On the other hand, no reference to the idea has surfaced since that first speech, so a lot of questions remain.
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