Saturday, 12 November 2016

Workers on boards: handle with care

Before I get into the detail of this post I just want to make one thing clear: pension funds' assets exist to fund pensions for the people that work for organisations - the workers. Those assets were also created by the labour of those workers - it is their deferred pay. So those assets should act in the interests of those workers. In addition those that manage but do not own those assets only have influence through other people's money.

With that in mind, let's consider two things. First, how are those that manage that capital, but to whom it does not belong, using the influence that derives from those assets to influence the discussion on whether workers should be represented in corporate governance, specifically through board membership? Second, how are those arguments being made?

Submissions to the BIS committee inquiry into corporate governance, which has specifically asked for views on worker representation on boards, gives us a perfect opportunity to look at both points.

Aberdeen Asset Management

Not opposed, suggests alternative:
There is a significant body of evidence showing that mixed teams make better decisionsThe best boards feature a mix of gender, ethnicities and socio-economic backgrounds.  Any board that believes it cannot be enhanced by the inclusion of views from significant parts of society is clearly suffering from closed minds in more ways than one... An alternative route for workers to have an influence on executive pay might be for an annual meeting to take place between the workforce and the remuneration committee... Worker representatives as full members of the board are possible in UK law without undermining the unitary board structure, and can add real value. FirstGroup has demonstrated this very effectively. 

Not opposed:
We do not have a strong view on this. A number of our international holdings already have such mechanisms in place, and there is no consistent discernable differentiation in terms of performance or stakeholder outcomes at these companiesWorker representatives could potentially add value, but it would depend on the skillset and motivation of the individual.

BlackRock believes all directors should first and foremost strengthen the competency of the board.  Directors therefore should bring skills and expertise in more than just one area.  Equally, directors should act in the best interests of long-term shareholders as a whole, rather than one particular subset of stakeholders, such as employees.  The latter risks the creation of special interest groups, which can act against the best interests of the company in the long term.  Instead, alternative mechanisms should be designed to ensure stakeholder feedback into the board. 

It has been suggested that employees should be represented on Boards and remuneration committees.  We are fully supportive of the principle that the voices of employees should be adequately represented at a senior level, but for the reasons given above we would be concerned with the appointment of employee Directors or any differentiation in the responsibilities of existing Directors.  We would nonetheless encourage the creation of mechanisms which facilitated the incorporation of employee and consumer perspectives into Board debates.  These could take a variety of forms but might include the creation of dedicated Board committees to address these issues.

In favour
...we believe it is appropriate that employees be given greater voice in UK governance arrangements... In the first instance we favour a non-legislative approach to promote the inclusion of employees in governance structures... In order to shift current practice, the UK Corporate Governance Code could be amended to provide an expectation that board composition includes employee representation and associated guidance included within the FRC’s soon to be updated board effectiveness guidance. Whilst we would not class employee directors as independent they would have the same fiduciary duty as their fellow directors to act in the interests of the company and not any one specific stakeholder
The Code’s criterion for board independence may need to be adjusted as would the stipulations around board composition and the guidance should be clear that the inclusion of a sole employee director should be avoided.

Opposed? Suggests alternative
The introduction of an employee sitting on a Board or establishing a shareholder committee, in our view, would significantly change the current roles and responsibilities of directors and shareholders. We continue to support the Unitary Board model in the UK and focus our efforts on how Board effectiveness can be improved within the current governance structure.
 In saying this, we also understand that directors should be accountable to other stakeholders including employees. 
One way in which there can be better alignment between employees and shareholders is for Boards to better understand the sentiment of employees in the organisation. This can be done by nominating one of the current independent Non-Executive Directors (a “Nominated Employee Non-Executive Director”) to be held accountable for seeking out employees views in the business. This nominated director will have responsibilities to meet with staff at different levels and report back to the Board the findings. Furthermore, in the Annual Report, the Nominated Employee Non-Executive Director should also provide a statement and report back to shareholders at the AGM or Annual Report of what he/she has done to fulfil their remit.

Whilst there is evidently a case for greater employee oversight, we believe that mandatory placement of an employee representative on boards will be unhelpful in the long-term. 
The role of executives is to drive a company forward for shareholders, employees and customers; to take account of the wider environmental, business and market factors. An employee representative would quite rightly be concerned with the welfare of employees, not necessarily that of the health and strategy of the business. 
It is the nature of businesses that employees focus on the short-term and day-to-day aspects of their roles rather than the long-term. The expertise required to set a remuneration policy for a global company is something that is restricted to those that have experience in the area. This is not to stay that they should not have to justify their decisions to their employees. It has become increasingly clear that employees should have a greater voice and the board in turn should have much greater oversight of the conditions of the employee base. 
In a few cases employee representatives on boards works. An example of this is FirstGroup where they have successfully incorporated an employee nominated director onto the board.

So, as you might expect, there isn't a lot of support from those who manage the assets of workers' pension funds for allowing workers to have representation in the corporate governance of UK companies. To restate, the only reason asset managers exist, and have the influence they do, is because generations of workers have deferred their wages and put them into pension funds. Therefore I find it troubling that those that manage workers' capital are arguing against greater representation for workers.

It's also worth looking at how these arguments are being made, as they reveal some issues that everyone should consider carefully, whatever your view about worker representation.

For example, to argue that workers shouldn't have board representation because they might act too much in the short term, or act only in their interests, not in the interests of the company, opens up the question of whether different interests within the firm align, or not. After all, over recent years we've been encouraged to believe that actually all our interests (those of the company, workforce and investors) are the same, at least over the long term. Here's some Mckinsey blah on this point:

in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, and communities, and proponents of value maximization have always insisted that it is long-term value that has to be maximized.

But if the case is now being made that workers have different interests that might conflict with those of others if they get a formal role in corporate governance, then we surely have to explore the question of whose interests should predominate. If there is a conflict of interests then what is the case in favour of shareholders having more influence than employees? 

To my mind, employees have far more firm-specific risk than investors, and are acutely aware of the need to act in a way that does not damage their known "investment" in the business. In contrast, especially where the "shareholder" is an intermediary, investors have far less at stake in any given company, and can often act in a very short-term fashion to their own benefit, whilst the long-term interest of the company might be different. After all, the whole "short-termism" debate is about the interaction between companies and investors, not companies and their workforces.  

The current debate in the UK over corporate governance is hugely helpful for opening up these issues that have for a long time - in our system - been taken as settled. For far too long too many people involved in corporate governance in the UK have confidently asserted we have the optimum model. This has obscured the fact that any governance model involves a choice about whose interests come first (this book, which is broadly pro the shareholder-centric model, is all about this question) and that other ways of prioritising these interests which might be as good or better. Andy Haldane made this point very well in a speech a could of years ago. It's interesting that it's when defenders of the status quo argue against giving others a real voice in corporate governance that they expose the cracks that have been papered over.

As I blogged previously, I am sceptical that the Government will hold its nerve on this one, and you can see the soft alternative being put forward by the corporate/financial vested interests as a compromise - have a NED who has responsibility for talking to the workforce. But the idea of worker representation in corporate governance is now taken much more seriously than it has been at any time in my adult life, and I doubt it is going away.

Keep pushing.

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