Can the workers on the board model work for UK companies?

Economy & Politics | Employment & Skills | National

It’s a system employed by the majority of European countries, but one which has so far failed to gain any legislative traction in the UK – so does the Workers On The Board model have a future in Britain? BLM investigates.

A company’s board exists for one fundamental reason – to make the business profitable for shareholders. Add employees to the boardroom makeup, and can it do that job as effectively?

There will be many who say it can; indeed, they may even argue that worker representation – and the fresh perspective it can offer – can actually improve a company’s performance.

But do the statistics support this view? Would British companies back such a move? And what would be the challenges – or even barriers – to introducing a Workers On The Board model for UK industry?

The current picture

Back in 2016, Theresa May pledged to make employee representation mandatory in major UK boardrooms – before backtracking just months later.

Her earlier argument that Non-Executive Directors provide ineffective scrutiny because they largely come from within ‘the same narrow social and professional circles’ as other board members was abandoned; watered-down replacement proposals instead approved designated Non-Executive Directors as a valid alternative to the system she had previously espoused.

Such appointments were one of three options made available to companies in the Corporate Governance Code in 2019, along with the appointment of a workforce director or a workforce advisory panel.

However, there was in effect a fourth option. Companies were given the option to ‘comply or explain’, meaning they could decide not to adhere to the code if they outlined why.

For those pushing to see workforce boardroom representation formalised in legislation – and there are many – the code was one of half-measures.

The arguments in favour

Workforce board representation is the norm across much of Europe. Some 19 out of 28 EU member states include statute to that effect, while for 13 of those countries, such rights apply in the bulk of the private sector.

The particulars vary from nation to nation, but the principles remain broadly similar. The idea is that input from the shop floor keeps senior management in touch with their workforce and customers, and boosts staff morale and commitment.

That theory seems to be borne out by data which shows countries with high levels of worker participation score highly in other areas too – including employment rates, R&D expenditure, and employee engagement. The latter, especially, is an area where the UK traditionally scores poorly, lagging well behind global economic powerhouses like the US, China and India.

Indeed, workers’ rights in general is not a UK strength. A 2019 global study by the ITUC rates the UK behind the likes of Togo, Malawi and the Republic of Congo for its respect of employee rights.

On British soil, the TUC has long campaigned for board-level worker representation, arguing it can go a long way to giving workers a meaningful voice in conditions, terms and working practices.

Crucially, however, the body’s All Aboard report – written by Senior Policy Office Janet Williamson – says companies would benefit as much as staff from such an arrangement, not least because happy workers are proven to be productive workers.

It said: “Given the contribution of workers to company success, and the proven link between staff motivation and performance, measures to boost the voice of the workforce in company decision-making look like good, old-fashioned common sense and economic justice rolled into one.

“Change has to start somewhere, and we believe that introducing workers’ voice at the highest level of the company would bring real business benefits and make a concrete difference to the culture and priorities of company decision-making and the lives of working people.”

The TUC is not alone in believing deeper governance review could have a meaningful impact. Andy Haldane, Chief Economist at the Bank of England, has argued that limited diversity in boardrooms can stifle growth both for companies and the wider economy.

He said: “If power resides in the hands of one set of stakeholders, and they are short-termist, then we might expect high distribution of profits to this cohort, at the expense of ploughing back these profits (as increased investment) or distributing them to workers (as increased real wages).

“To some extent, this matches the stylised facts on rising inequality – rising executive and shareholder compensation and faltering real wage growth.

“One avenue worth considering further is corporate governance reform. A set of corporate incentives which had as its fulcrum long-term company value and which more fully reflected the interests of a wider set of stakeholders might help rebalance the scales – for example, towards investing rather than distributing.”

Workers on the board in operation

A handful of UK firms are ahead of the curve on worker representation, though. Transport firm FirstGroup, for example, has blazed something of a trail by reserving a boardroom seat for an Employee Director since its inception in 1989.

A spokesman told Business Leader: “In our experience, the perspectives and input of Employee Directors aids decision-making and demonstrates the company’s desire to hear from our workforce. Directors and workers alike find Employee Directors invaluable in providing a closer link between the depot and the boardroom.”

FirstGroup remains the only publicly-listed UK firm to integrate workers in company governance in this way, and says it believes ‘a considerable part of its overall success is attributable to such involvement’.

But is there data to prove worker board members increase the odds of success? In short, it’s difficult to draw any causal conclusion – an extensive review of the impact on company performance, conducted largely in Germany where such models are considered well-evolved, can pinpoint no direct correlation between employee-level boardroom representation and financial performance.

Nor does it guarantee transparency or ethical conduct, it seems, as the 2015 Volkswagen emissions scandal played out amid allegations of selective blindness in the boardroom from both sides of the executive/worker divide.

The arguments against

Quite simply, UK companies don’t want workers in their boardrooms.

Research by the Chartered Governance Institute – a UK body for governance professionals with 14,000 members – reveals overwhelming opposition, with 70% of member respondents saying ‘no’ when asked whether they believed having workers on their boards would be a good idea.

Confidentiality issues were cited as a major concern, along with doubts over whether workers with the right skillset could be found to make a meaningful boardroom contribution. Practicality issues were flagged too, especially for larger firms, where it would be impossible for a single voice to effectively represent thousands of staff working in a wide variety of functions, locations and pay grades.

There are also likely to be times when a board faces tough decisions that could leave a worker representative unable to reconcile their responsibilities to both their colleagues and the collective good.

Julian Hemming, Partner at Osborne Clarke.

Julian Hemming, Partner at law firm Osborne Clarke and co-chair of the firm’s employment law group, agrees that could be a challenge. He said: “All directors have duties under the Companies Act 2006 which include: to promote the success of the company; to exercise reasonable care, skill and judgment; to avoid conflicts of interest.

“Complying with these duties can sometimes involve the board in making decisions that are not always approved of by employees and can put the employee representative in conflict with the employees and fellow board members.”

Rigorous selection criteria is applied to UK board appointments too – something Hemming says would be difficult to enforce when electing employee board members.

He said: “In the UK, the Financial Reporting Council sets the UK Corporate Governance codes for listed companies, which requires that all appointments to the board should be subject to a rigorous procedures and should be based on merit and objective criteria and should promote ‘diversity of gender, social and ethnic backgrounds, cognitive and personal strength’.

“Similar care will need to be taken to ensure a breadth of potential candidates stand for the board, to avoid the selection of the one candidate who stands and who otherwise may not fulfil the above criteria.”

What next?

Further government-led reform on boardroom composition seems unlikely, at least in the short term – not least after Boris Johnson stripped a workers’ rights clause from the UK’s EU Withdrawal Deal.

A wave of voluntary private sector employee boardroom appointments should not be expected either, after the Chartered Governance Institute’s study showed 91% of firms have no current plans to do so.

However, with more and more firms waking up to the need to do more to engage and retain staff, a middle ground could emerge.

Financial services company Hargreaves Lansdown is one firm with a clear policy of valuing worker input – albeit outside of the formal boardroom.

Head of Policy Tom McPhail said: “The broad principle of managing a business on a collaborative basis between board and workers is a good one, with the board both taking input from employees and sharing key insights regarding its decision-making. This not only enables the board to take into consideration input from a critical group of stakeholders, it also strengthens employee buy-in to corporate strategy.

Tom McPhail, Head of Policy at Hargreaves Lansdown.

“Hargreaves Lansdown has adopted the approach of a colleague forum, which draws on structured input from a broad representative sample of employees. Views are sought in a structured format, with a briefing ahead of the meetings, an anonymised report submitted to the board (so employees feel free to speak openly) and with a board response returned to the colleague forum after the board meeting.

“We believe this strikes the right balance of engagement between employees and the management of the company. Ultimate accountability to stakeholders should reside with board members who have been recruited and paid to run the company.”

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