Only days before becoming Prime Minister, Theresa May unexpectedly announced her intention to shake up the UK corporate governance system by requiring company boards to have employee representatives. Her pledge has been met with some scepticism, and it is currently no more than a vague proposal. However, if it is taken forward, what might employee representation at board level look like, and could it actually be good for business?
The European way
A majority of the EU member states, plus Norway, have well established worker representation on company boards. These include some of the most successful economies such as Germany, the Netherlands and Sweden.
The way in which workers' participation rights operate varies widely from country to country. Variations range from how representatives are elected and who is eligible, to which companies and board structures are covered and the proportion of worker representatives per board.
In many countries, unions are involved in the nomination of candidates, but regardless of union involvement in the nomination, candidates are elected by the workforce in nearly all countries that have worker representation. In a couple of cases, the appointment is at the company AGM. In most circumstances only company employees are eligible, sometimes with a union connection (with an interesting exception in the Netherlands where neither company employees nor union representatives are eligible, and representation on the board is carried out by "worker friendly" third parties).
In a majority of member states, participation rights apply to both private and listed companies ranging in size from 25 employees (Sweden) to 1,000 employees (France). Some countries restrict the right to listed companies only, or to state owned or privatised entities.
In terms of the number or proportion of employee representatives, again there are significant variations. Employee representatives making up a third of the board is the most common provision, but it can range from only one member up to half the board. Regardless of number, workers cannot exert a blocking or binding vote against the rest of the board. Furthermore, board structures also vary, including countries with a unitary board (like the UK) as well as those with a two-tier or supervisory board structure.
Is there a UK way?
Clearly, there is no "one size fits all" approach to employee board representation. Instead, it can operate in a wide variety of ways and across a range of corporate governance systems. There have as yet been no clues as to how the framework for employee representation in the UK might work, except that Mrs May referred in her speech to the reform of "big business", thus indicating that large employers will be the most likely targets, at least initially. In any event, if the Prime Minister is serious about employees on boards, the appropriate model will no doubt form the subject of intense and lengthy debate. But quite apart from agreeing the detail of any proposals, perhaps the most important task, if she wants her pledge to become reality, will be to lead a re-shift in culture at the top of companies, along with a new vision for industrial relations and corporate governance.
There may also need to be some reconsideration of directors' duties under English law. At the moment, all directors, whether non-executive or executive, have the same responsibilities under the Companies Act 2006. Unless the employee representative has some kind of separate standing, they will not be able to look at matters purely to advance the interests of employees, as that would be a breach of their responsibilities as a director.
Is the PM on to something?
While the concept may seem alien in the UK and a step too far for many, supporters of employee representation point to the economic success of several European countries which have well embedded systems of worker representation on their boards. Their argument is that employee representation has led to more cooperative workplaces, where better communication is promoted and workers' voices in the decision making process contribute to a more balanced corporate strategy.
In addition, Theresa May has spoken of the significant increase in executive pay over the past 20 years as a worrying feature of UK businesses. She may feel that worker representatives will not only make businesses more accountable and focused on their long-term success, but also act as a more effective brake on excessive pay than the existing legislative framework.
There has been movement over the past ten years to have greater board diversity, which has been primarily focused (in the UK at least) on increasing female representation; but a broader view of diversity would say that worker representatives could also improve the quality of boardroom decision making by giving a different perspective to their debates.