A Look Back at the Week that Was: This Week – Employees on Boards

At their annual conference last week, the Labour Party announced that if they are elected then they will require companies with more than 250 staff to reserve 1/3rd of the seats (minimum 2) on their Boards for employees. 

Having mandatory employee representation on Boards is something that was touted previously by Theresa May but was subsequently watered down.  No legislation was introduced in the end, but it did make its way into the 2018 revision of the UK Corporate Governance Code (the CG Code) as one of the options for demonstrating that there has been effective stakeholder engagement. Organisations who have to apply the CG Code (or who have voluntarily chosen to adopt it) will be required to make a statement in their annual report about how the interests of employees have been considered in board discussions and decision-making.  The CG Code says that one or more of the following methods should be used: a director appointed from the workforce, a formal workforce advisory panel, or a designated NED.  If none of those options are adopted, signatories to the CG Code are expected to explain how their alternative arrangements are effective.

Labour’s proposal goes much further. The theory behind it is that the employee presence would shift the balance of power which has allowed a “reckless corporate culture to fester” and businesses to get away with “exploitative practices”. Setting aside the fact that this rationale tars all organisations by the behaviours of just a few, what other issues does it present?

  1. Identity of the employees

The proposal is that employees should be elected to the Board. The fact that some organisations have appointed Executive Team members to the Board will not satisfy the obligation.

It is reasonable to assume that under Labour’s proposals there would be no ability for the employer to ‘vet’ the candidates or to assess the skills and experience that they could bring to the Board.  As organisations have been increasingly moving to skills-based boards, this could be seen as a backwards step – unless an organisation is exceptionally lucky to find all the skills it needs within willing members of the workforce.

But perhaps even more controversially, the pool of employees who could stand for election would be limited to just trade union members.  So it is something of a misrepresentation to sell this proposal as being about employees being on the Board – it is actually about having trade union members who just happen to be employees on the Board.  The assumption that a trade union member is better able to understand strategic issues and/or represent the views of colleagues surely needs to be challenged.  Many employees may in fact feel that their views are not best reflected via the trade union movement.

  1. Managing confidentiality and conflicts

One of the central tenets of governance is the fiduciary duty to act in the best interests of the organisation (codified in the Companies Act as a duty to promote the success of the company).  A director’s duties are therefore to the organisation, not to any particular constituency interest. A workforce director will have a difficult line to tread.  Particularly tricky could be areas where a conflict of interest arises because of proposals to make changes within the organisation (for example organisational restructuring). A Board will often be privy to such information long before there is any announcement to staff. Will it be possible to exclude the workforce directors from those discussions on account of a conflict of interest? If it is actually the workforce who has been ‘exploited’ in the past then being able to exclude them from such discussions and decisions would seem counter-intuitive under Labour’s proposals.

  1. Collective responsibility for decision-making

Another central principle of governance is collective responsibility for decision-making. A director can make their opposition known before a decision is made but once that decision has been made, every director is expected to stand behind it – or ultimately resign if they can’t.  Applying this principle, there could be a lot of churn amongst the workforce directors where decisions are made which may genuinely be in the best interests of the organisation but which adversely affect the workforce.  This churn could come about either through the workforce director not agreeing with the decision made, or agreeing with it but then finding themselves in an untenable position with their colleagues.

Of course a Board should want to be aware of the views of the organisation’s employees, and perhaps it would be a good discipline that proposals for organisational change are subject to the sort of rigorous scrutiny that being able to justify them to the satisfaction of a workforce director would deliver. But if there is to be an employee voice around the Board table then I don’t see why it should be a union voice, and there are lot of unanswered questions about how this proposal would sit with core principles of governance and how an organisation could get all the necessary skills that it needs amongst its Board if it had to take 1/3rd of its members from a defined pool of people.

Kirsty Thompson, Partner, works within Devonshires Employment & Pensions Team.

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