Monday, 31 December 2018

Employee representation at board level: first steps

As most people will be aware, the revised UK Corporate Governance Code kicks in next year, and an important element of it relates to "employee voice". At the risk of overstating things, the change in the Code is significant as, for the first time in its existence, the text recognises the importance of the workforce.

As I've blogged over the years, the question of employee representation at board level (part of a wider discussion about the role of the corporation) has been rising up the policy agenda for five years or so. By the time of the 2015 election all the major parties, bar the Conservatives, had language in their manifestos backing some form of employee representation. And once Theresa May became PM the Conservatives followed suit.

Anyway, back to the Code: there is limited information from companies so far on their approach. What we do know is that two companies - First Group and Mears Group - now have employee directors and that a third - Capita - is currently recruiting (and may appoint two). I suspect that there will be more companies that go down this route, probably those where unions have a stronger presence and industrial relations are more formalised. I do wonder too if it will be companies that have a fairly simple geographical spread, with UK-oriented employers more likely to find it easy to appoint a "representative"... err... representative.

We also know that several companies have gone down the nominated NED route - Legal & General, Sthree and Diageo, for example. I am aware that other companies are looking at this model though there is little public information yet. My gut feeling is that this will be the most common model adopted by companies. Some arguments you hear for this include that it ensures that the employee representative is acting in the interests of the company, not the workforce, that it ensures that there is an informed voice at board level and so on.

Finally, the only other example I know out there is Sports Direct, which has appointed an employee representative but who isn't a director. Weird that they are out of line with mainstream corporate governance practices eh?

A couple of things to note. First, appointing employee directors is the favoured option of the TUC and those unions that have commented on this issue (including Unite). In contrast, the nominated NED idea has largely been backed by mainstream corp gov people and some major investors. I need some persuading that PLCs ending up with a model of employee representation that is favoured by management and capital, but opposed by labour, is a) a great look and b) going to hold for long.

When the UK decided that it needed to tackle the issue of gender diversity at board level, companies were not given the option of nominating an existing non-executive to represent women. Everyone can see how ridiculous that would be. But I'm not convinced that designating an existing non-executive as a representative of employees is much more reasonable. Advocates of greater gender diversity and employee representation at board level do so because they believe that this would improve the dynamics of the board. If our expectations of any board member is that they act in the interests of the company I'm not sure there is a massive difference between promoting gender diversity and employee voice.

As I've blogged before, I think implicit in this discussion is the idea that employee directors would seek to favour their own interests over those of the company and/or the shareholders. But if we take this at face value it is reasonable to ask to further questions: whose interests *should* predominate in corporate governance, and in what circumstances? And does the absence of employee voice at present mean that the interests of employees are under-represented in board discussions? After all if interests conflict, and the presence of a representative of an interest group enhances their ability to assert their claims, presumably their absence must weaken it? Status quo bias springs to mind here.

Secondly, we need to recognise that we are at the very start of the process here. The idea of employee representation at board level is still fairly new to many people in the microcosm that I inhabit, and the revised Code is the UK's first stab at trying to address it. But it won't be the last. For example, I think there is a fairly decent chance that Labour will end up back in government in the next few years. Even if this was as part of a coalition it's unlikely it would face a political problem getting its policy of mandatory worker directors through. It's a cost-free, symbolic policy that likely coalition partners would support.

Finally, let's not forget the "storm in a teacup" nature of discussions of ideas that fall outside the corp gov mainstream. For example, I was rereading some material about annual election of directors the other day and it reminded how overblown many of the arguments were. Entire boards would be voted out, and directors would be put under intolerable pressure. In reality, the huge majority of directors of UK PLCs face no threat whatsoever of being voted off the board. To my knowledge no entire boards were removed. Shareholders have used their powers sensibly, as proponents of annual elections said they would. But annual elections have enabled them to repeatedly challenge unpopular directors like Keith Hellawell.

My priors are that companies are smart enough to want to recruit good employees, and that good employees are smart enough to want to pick representatives who can handle the demands of being a board director. So, ultimately, I think employee directors will become the norm over time. The corp gov playing field will tilt slightly more towards labour, some people will freak out, and a decade later we will wonder what all the fuss was about.

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