Analysis: Worker representation on UK boards hampered by lacklustre investor reaction

Big institutional investors sceptical of Prime Minister’s signature policy

What are the chances of workers ever getting a seat on UK company boards, if BlackRock, with $5.1trn asset under management, or Royal London Asset Management, with £93.8bn, oppose it?

Theresa May, the UK Prime Minister, first suggested the idea at her maiden speech in July: “we’re going to have not just consumers represented on company boards, but workers as well.”

In October, during the Conservative Party conference she reiterated the idea. “Because we are the party of workers,” she added then.

But workers don’t seem to be welcomed in UK boardrooms, at least by several prominent players in the financial industry who recently sent their written submissions to an ongoing corporate governance inquiry run by a select committee of the UK Parliament. Link

One of the questions put forward by the Business, Energy and Industrial Strategy Committee is precisely whether workers should have representation on boards and/or remuneration committees.

Negative answers were given by household names like the British Bankers’ Association, PwC, the Institute of Directors, Standard Life and the Investment Association (at the time of writing, some new submissions were still being published by the parliamentary committee).

Needless to say, they recognise that employee interests should be heard, although via second-class engagement mechanisms (e.g. employee surveys).

The reasons why workers are an inconvenient presence in boardrooms are not ideological, just technical: such a policy idea breaks the UK unitary board model, where no group or individual can have special representation, recommended by the (voluntary) UK Governance Code.

So it’s a technical construct, and seemingly an untouchable set-in-stone dogma. But what should prevent Parliament from legislating whatever MPs consider fair?

Reading between the lines of the submissions, the subtext is clear: there is no room for workers on the board because they might be better off minding their own business and letting directors perform their duties alone.

How this opposition to worker representation is articulated in their responses to the parliamentary committee deserves a closer look.

BlackRock warns that having employees in boardrooms could deliver a strong message against directors’ skills: one that directors “lack the requisite competence and employees must be sent to ‘police’ them”.

BlackRock’s submission also questions the tradition of worker representation in France and Germany, saying: “There is no evidence that the presence of employee directors has resulted in better decision-making or better performance.”

Certainly in the light of the treatment of Sports Direct’s workforce, the French or the Germans could also argue that the opposite is true: the absence of employee representation is no guarantee of good decision-making.

The investment firm also foresees unintended consequences of mandating stakeholder representation on boards. The creation of such a sort of director tribes within the board carries the risk “in extreme circumstances” of its own paralysis “by conflicting interest”.Royal London says that whilst there is “evidently a case for greater employee oversight” the whole idea is “useless in the long-term.”

It adds: “It is the nature of business that employees focus on the short-term and day-to-day-day aspects of their roles rather than the long-term.”

Regarding seats on remuneration committees for workers, it continues: “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.”

Therefore, Royal London argues that a potential employee representative “would quite rightly be concerned with the welfare of employees, not necessarily that of the health and strategy of the business.”

Jiří Król, deputy CEO of the Alternative Investment Management Association with members representing more than $1.5 trillion in assets, puts it bluntly: “A risk of having employee directors is that they are disproportionately focused on employees and not shareholders and so may not have the skills and experience to properly carry out those duties.”

However not all submissions dismiss employee representation. Hermes Investment Management, the £28.6bn manager owned by the BT Pension Scheme, seems more receptive to explore new ideas, even if they are not scrupulously in line with the UK unitary board dogma.

First, Hermes states: “It is too often forgotten that it is ordinary workers who in addition to being the providers of human capital to a company also own the financial capital through their pension schemes.”

Second, it points out that the idea is feasible: “UK law already permits employee directors […] In order to shift current practice, the UK Corporate Governance Code could be amended to provide and expectation that board composition includes employee representation.”

Even the UK regulator, the Financial Reporting Council, doesn’t rule out changes. In a balancing act, CEO Stephen Haddrill, recognises that there are many methods to engage with employees, and writes: “appointments to the board are one way, although should not unnecessary promote one group over another.”

Further, Hermes recognises that representation of employees on company boards is common practice in Europe and beyond: “There are undoubtedly lessons that the UK can learn from those jurisdictions […] We have heard much positive anecdotal feedback from those directors who sit on boards which include employee representation.”

Some other peers, while still in favour of keeping the unitary board model, suggest a half-way house solution.

For instance, Legal & General Investment Management, with £853bn of AUM, supports the idea of a “nominated employee non-executive director” drawn from existing directors. This “employee champion” would be held accountable for seeking out employee views.

The UK parliamentary committee have received more than 150 written submissions, which will be studied before it hears witnesses. The committee told RI that it expects to hold four sessions of witness hearings, with a couple of expert panels each time. After that, within the first quarter of 2017, it will release a consultation report.