Will workers on boards be Theresa May’s most lasting legacy?

The time has come for employee representation at board level

The imminent departure of Theresa May as UK Prime Minister marks the end of a premiership dominated by Brexit. But she leaves behind one important, if somewhat bodged, corporate governance initiative: employee representation at board level.

When May was campaigning to become Prime Minister in 2016 she stated that under her the Conservative Party would be “completely, absolutely, unequivocally at the service of working people” and that “we’re going to have not just consumers represented on company boards, but workers as well”.

The revised UK Corporate Governance Code, which came into force this year, is what is left of that ambition. It contains a significant new section focused on workforce engagement. In the end, after significant corporate pushback, the Code offers three main options: appoint an employee director, designate a non-executive director as responsible for workforce engagement, or set up a workforce advisory committee. Companies are also free to develop alternative mechanisms, or not comply with this section of the Code at all, and explain why.

PIRC is a long-standing advocate of employee representation in governance. Back in 2009, in the immediate wake of the financial crash, we issued a manifesto for reform that included a call for the department that is now BEIS [the Department for Business, Energy and Industrial Strategy] to undertake a review of how to introduce employee representation. As such we were supportive of May’s ambition, even in its watered down form in the Code. Our view is that denying employees a voice in governance risks applying a 19th century model of the firm to 21st century businesses. Investors operate in a world in which intangibles matter more than ever, and human capital is critical, often more so than financial capital. Giving a voice to those who know the business from the inside could have significant benefits.

Aside from instrumental value to investors, there is a case to be made for employee voice in governance on its own terms. Employees shoulder firm-specific risk that investors are able to mitigate through diversification. And if we want to challenge the argument that the economic system does not currently work in the interests of employees, giving them a voice in the heart of the capitalist system seems a necessary step.

So, since the start of the year, we’ve been engaging extensively with UK-listed companies to both set out our views and to find out how they are responding. We wrote to the FTSE 350 to make clear our preference for employee directors, as opposed to other options set out in the Code. We’ve also raised the issue of employee representation in engagement meetings with companies, and we’ve been in touch with employee directors themselves. Finally we’ve been talking to both regulatory and public policy staff in various countries to get their views.

Overall, it’s clear that, while progress has been unimpressive, it feels like an important shift may be starting.

Let’s look at the negatives first. Most disappointingly, the voice of employees themselves is still rarely heard, even though the objective of the Code is to engage them. Our sense is that this element of the new Code has been treated by too many boards as a something that requires a top-down decision, rather than an opportunity to see what employees might bring to the discussion themselves. This is a huge missed opportunity.

In practice it is clear that most companies in the UK are choosing alternatives to giving employees seats at the boardroom table.The most common is for companies to nominate a non-executive to be responsible for workplace engagement. There are some truly unimpressive examples out there too, like the company that appointed its former CEO to the role!

“It feels like an important shift may be starting.”

Some of the reasons given for not appointing employee directors are telling – ‘the company needs to have experienced professionals on the board’, ‘directors can’t represent just one sectional interest’, ‘one or two employee directors cannot speak for a global workforce’, and so on. Yet many of these boards have designated a single non-executive to be responsible for workforce engagement. Why is it any easier for a non-executive to process the views of a global workforce, or balance competing interests? And can boards really consider their people to be their greatest asset if they don’t believe any of their employees are capable of serving as directors?

On the positive side of the ledger, a small number of companies, like Mears Group and Capita, have appointed employee directors. We’ve also heard from some companies that haven’t done so this time but say that in a few years the picture may be different.

When we look at public policy, there is widespread support for employees on boards. All the major UK parties have made commitments to extend employee representation in corporate governance in some form, and think tanks like the IPPR have also advocated it. We see movement in other markets too. For example, in the US both Elizabeth Warren and Bernie Sanders, both seeking to be the Democratic candidate in next year’s presidential election, have advocated extensive employee representation on US boards. And polling on both sides of the Atlantic shows public support for such representation.

As such it seems likely that the current Code is the beginning, rather than the end, of the UK’s exploration of the potential role of employees in governance. And given the reluctance of companies to explore employee representation voluntarily, future politicians and policymakers wishing to give employees a voice in governance are more likely to legislate for it.

The current political environment, and the intense scrutiny of our capitalist system, is going to require compromise and willingness to think afresh about issues long since thought to be settled. Inevitably this must involve looking again at the structure of the firm – the engine at the heart of capitalism – and ensuring that relative contributions are properly recognised.

It was another Conservative politician – Lord Eustace – who addressed this point with admirable clarity in his 1944 Riddell Lecture:
“The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise — the association of shareholder-creditors and directors — is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one.”

Seventy-five years is long enough to wait. It is time to give those that work for the companies in which we invest, and who create value for us as investors, a voice in the firm.

Tom Powdrill is with PIRC.