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Should UK companies have employees on their boards?

Eight people sitting around a table in a meeting

Workers should be placed on company boards to “inject some much-needed common sense into boardrooms,” says Paul Nowak, general secretary of the Trades Union Congress (TUC).

Nowak’s comments were featured in an article by The Guardian reporting that FTSE100 chiefs were paid more in the first three days of this year than the average worker is. However, this debate has been ongoing for some time.

Back in 2016, Theresa May pledged to represent workers on company boards during her campaign to become prime minister but opposition from the Confederation of British Industry (CBI) meant May’s proposals were watered down.

In 2018, the Financial Reporting Council (FRC) introduced a new corporate governance code outlining three possible methods for “engagement with the workforce”:

  • A director appointed from the workforce
  • A formal workforce advisory panel
  • A designated non-executive director

For boards that have not chosen one or more of the above methods, the code says they should explain what alternative arrangements are in place and why they consider them to be effective.

Although there is no legal requirement for UK companies to represent staff in the boardroom, following the FRC’s changes, a report from the Labour Research Department found that workforce representation on UK company boards is now more likely than at any time in the last 40 years. However, an analysis from Women on Boards found that just six of the 585 companies listed on the FTSE All-Share have an employee representative in the boardroom.

One of these firms is the Mears Group. The housing and social care provider appointed its first employee director in 2018, and according to the company’s executive director Alan Long, the employee director is the single representative for employees at the group.

“Their role ensures that the board receives full, open, and honest insights and views from our workforce on how strategic initiatives are being implemented,” says Long. “Equally, it encourages colleagues, through the employee director, to gain a better understanding of how the board works. Our chief executive is then committed to resolving any issues which are raised.”

The Mears Group also has a deputy employee director, a lead trade representative and an active employee forum. “While it is only the employee director who attends board meetings, the employee representative team champions key issues directly into the board via the employee director on a regular basis,” adds Long. “Crucially, none of the team is part of our HR team as we felt complete independence and impartiality are important considerations.”

When asked how having an employee representative on the board had impacted the running of the company, Long pointed out that Mears has been recognised as one of the top ten best big companies to work for in the UK and ranked eighth overall in the prestigious Best Companies’ league table for 2023.

“Staff turnover and vacancies are low, and our employee indicators such as satisfaction and pride in our brand are at an all-time high,” he adds. “It’s no coincidence that our financial and customer performance has also been excellent, and our employee director and team have played an important role in this.”

What does the research say?

Research from the High Pay Centre suggests the UK public is in favour of worker representation on boards. In a poll of 1,104 people, 70% believed it would benefit the pay and conditions of workers, 59% thought it would improve the UK’s economic performance, and 53% thought it would aid business decision-making.

Vlerick Business School in Belgium also looked at the 600 largest businesses across European countries, including 159 UK companies, and found that having an employee representative on the board does not necessarily mean a CEO’s pay will be reduced. The research found that CEOs in Germany, where 78% of companies had a staff member on the board, are among the highest paid in Europe.

“Worker directors are the norm across much of Europe and research shows that countries with strong workers’ participation rights perform better on a whole range of factors, including R&D expenditure and employment rates, while also achieving lower rates of poverty and inequality,” says Janet Williamson, corporate governance lead at the Trades Union Congress, the UK’s national trade union centre.

However, “it is difficult to compare companies with and without worker directors within countries, because countries with a significant number of worker directors are those with legal requirements for worker directors, so you lack a comparator group,” she adds.

According to Dr Jonathan Lord, senior lecturer at the University of Salford Business School and labour law expert, “most workers will have a broader interest in the long-term success of their company, unlike many shareholders who can simply sell their shares when they are unhappy or nervous about the direction of the company.”

He believes workers are affected more than any other group by company decisions and should have meaningful decision-making powers. “Their participation would encourage boards to be more transparent and take a long-term approach to company success,” he adds.

However, the labour law expert also believes a proper framework has to be established “as issues can arise from worker representatives and company executives who establish deals to maintain power and jobs, which is what happened at Volkswagen.”

University lessons

Codetermination laws have been in place at many UK universities since the 19th century. For example, the Cambridge University Act 1856 gives most of its academic staff voting rights over the university’s leading administration body, the Council of the Senate.

Lord is surprised there is no general codetermination law in the UK as he believes worker voice at UK universities has helped curb the power of heads of colleges and create a more centralised university authority.

He continues, “Most UK Universities now have a Council made up of external and internal members at all levels of the organisation and responsible for the strategic oversight of the institution’s activities, determining its future direction and ensuring compliance with its framework of governance. These are usually transparent forums that are minuted and made accountable for their actions but would only really work for larger organisations.

“Smaller companies who need to work more nimbly would be stifled by such approaches and would be affected by a bureaucratic approach to decision-making,” he adds.

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