Changing of the guard in corporate governance

I have been blogging a lot recently about employee representation on boards. This is partly because I'm an advocate of it, partly because no-one else seems to be tracking the issue properly and partly because I think the issue is part of a significant shift that deserves more scrutiny. So I thought I'd write something a bit longer than usual looking at a few interlocking themes.

1. Employee representation at board level, state of play 

Just a quick recap, there are now four UK-listed companies with employees in their board structures:

FirstGroup
Mears Group
Sports Direct
TUI

The last one is unusual as it's incorporated in Germany but listed in the UK (and in the FTSE100). Because of its size it is required to have the co-determination model of governance, so it has a supervisory board with half employee reps, including union officials. None of the TUI employee reps are from the UK as far as I can see.

Of the the other three, two are female and one male. For completeness there is also a female UK employee director on France-listed ATOS. So I think there are (at least) four UK employee directors, three of them female. There will be more. We also know that Capita is recruiting two employee directors (which will make it the first UK PLC to have multiple reps), and there may be others going down this route that we don't know about yet.

As for companies choosing alternative models, here are those that have made public that they are designating an existing NED to represent employees:

Diageo
Hays
Legal and General
McKay Securities
Ted Baker

But there will be plenty more choosing this option. For now...

2. Opposition to and biases about employee representation 

It is worth restating that employee representation at board level has been opposed by a lot of powerful players in mainstream corp gov. This has varied from outright opposition to putting forward much weaker alternatives (like designated NEDs). I think that publicly-articulated views have been toned a bit over the past couple of years, but here's a reminder of some asset managers' positions. I'm also struck by the tone of this comment from the ICGN:

In Provision 3, we believe it does make sense for boards to understand views from the workforce, and it is important that flexibility is granted about which approach would work best for individual companies. The workforce is a critical stakeholder for long-term company success, but companies and workers must remember that the workforce of one of a number of important stakeholders—and the workforce should not become the board’s proxy for all stakeholders. 

And here is another mainstream corp gov view from Eumedion:

Although we understand these proposals [for workforce engagement] in the UK context, we believe that these proposals can have unintended consequences as they can increase tensions between stakeholders themselves and between the board and the various groups of stakeholders. Those tensions will typically appear in stretching situations, such as in the situation of an unsolicited takeover proposal or in the situation of pressure from specific short-term oriented shareholders to change the company’s strategy and policy. 

It is worth anyone interested in corporate governance probing these arguments, as there are some meaty issues (and assumptions) buried within them. I am frequently shocked by the patronising tone that many people adopt when discussing these questions, revealing a low opinion of employees. The implications are often that employees lack the ability to contribute anything constructive, or to think long-term about the company they work for, or to pick representatives who will be effective.

It reminds me of a speech I saw once by a trustee of (I think) WH Smith pension fund. He had previously been an exec at the company (possibly FD?) but had ended up becoming a member trustee for some reason. He said he found it eye-opening because he realised when he was wearing the "company" hat he simply could not see pensions issues independently, even though he thought he could. His views were shot through with the biases that came from his position. He didn't realise this until his position changed.

My point is simply that we are all biased, and we all have views that are shaped by the interests that derive from our current position. I am obviously biased, for example, because of my experience in the labour movement (see note at the end for more info about how this can screw up the way I look at things!). My argument is that in this particular discussion mainstream corp gov organisations often seem to reflect quite deep biases. Perhaps, like the trustee, they can't even see them from their current position.

3. The 'centre' has shifted to the Left, even if corp gov hasn't noticed 

Again, I have blogged about this before, but it is striking that in public policy the idea of employee representation at board level is totally mainstream. All the major political parties have committed to it, and it is the Conservatives who have made the first attempt to introduce it. We can also see from polling - in the UK and US - that the idea is popular with the public, including quite a few Right-leaning voters.

The idea is attracting more attention because of the increasingly widely held view that workers in countries like the UK and US have had a pretty rough time of it in recent history and that capitalism has to change a bit if we're to prevent political problems. We're also starting to see quite frequent pieces questioning whether shareholder primacy is part of the problem. A theme I'm trying to work on is what comes next - I think (at least) it will involve reformed directors' duties, employee representation and greater pre-distribution through ownership, profit-sharing etc. I've also argued that shareholder primacy in utilities is under threat.

I think it's entirely fair to say that these views have come almost exclusively from the Left up until the last five years or so. But now they are pretty much the centre ground in public policy.

Enter Chuka Umunna, of the newly-formed Independent Group (TIG) of MPs, who has published a new pamphlet on what 'progressives' (bleurgh!!! hate that term) believe. I'll just pull out a few relevant bits:

What would this “British model” look like? It could take as its foundation northern European elements: employee ownership trusts; workers on boards and public-spirited non-executive directors, moving towards a form of co-determination as a way of decision-making in the workplace; trade unions; incentives for innovation within firms; long-term financing; and a National Investment Bank with a network of regional banks driving Britain’s public investment rate to the G7 average of 3.5%... The defining characteristics of this hybrid model would be: collaborative workplaces and competitive practices in innovative firms that pay a decent wage, share profits with workers, and give security to those who work within them.

.....

For example, the “British model” could create new tax incentives and legal certainty for mutuals and a vast roll-out of employee ownership because the evidence shows this would encourage long-term ownership and diversify ownership of capital. It would forgo the automatic assumption that nationalisation improves performance in favour of taking a “foundation” share in privatised utilities to force them to serve public good. It would incentivise widespread membership of collaborative unions and employee representatives on remuneration committees.

.....

Too many of the rewards of these new technologies accrue to a relatively small number of individuals, exacerbating inequalities. New ownership structures must be developed to ensure greater distribution of the benefits both to workers and wider society. Employee ownership trusts can be used to spread the rewards in such companies beyond the founders to the workers at large. 

.....

An incoming progressive government could legislate to force companies providing key public services to write the provision of public benefit into their constitution, taking precedence over profit-making. It can then insist on taking a "foundation share" in each company as a condition of its operating licence. This share can be used to install non-executive directors tasked with seeing that the company delivers its newly enshrined public purpose. This would be a smart use of government power for the common good – with shareholders retaining their shares, though now constrained by the primacy of public benefit over shareholder return.

This stuff is well to the Left of New Labour, and even significantly to the Left of Labour's Miliband era shadow business secretary... if anyone remembers him? But TIG is positioning itself as very much in the centre (the pamphlet is published by Progressive Centre). And I think views of this type is pretty much where the centre is going to be in the future.

Mainstream corp gov is simply not here yet, and as such is more likely to be affected by change than to shape it. Look forward another decade and I would not be surprised to see that employee directors are common on UK company boards, that employee ownership and/or profit-sharing has become more widespread. I would like to hope that there is some kind of push to reinvigorate unions too, but I am less confident on that front.

What I don't think will happen is that most UK companies designate an existing NED to engage with their workforce and it will end there. I don't think that a future government will observe companies avoiding having proper representation and think "this is fine, job done".

-----------------------------

Mea Culpa - as an important aside, I have to remember not to blog when I've got strong emotions about a subject! When TIG split off I thought I shouldn't blog about it as I have too much emotionally invested in the state of the Labour Party. I could see a lot of people predicting how TIG would position themselves - partly out of anger, partly trying to bomb their planes before they take off - and could see it was pointless. But because my emotions got the better of me I felt compelled to write something. And because I want to see a certain outcome I projected this. Bad mistake, made worse by the fact that I knew I was making it.