Against the backdrop of rising populism and low levels of trust in UK businesses, the Financial Reporting Council (FRC) has been considering how to bring the voice of employees into the boardroom as part of its ongoing efforts to revise the country’s Corporate Governance Code. This follows on from the UK government’s work on the same topic as part of its corporate governance reform green paper in 2017.
Unlike regulation in other European countries, UK law does not mandate board level employee representation. However, section 172 of the 2006 Companies Act requires directors to take into account the interests of employees and other stakeholders.
The FRC has now consulted on a new code provision requesting boards to come up with a method for gathering the views of the workforce of their companies with the intention to strengthen the voice of employees at the board level. It highlights three specific employee engagement mechanisms, namely the appointment of a designated non-executive director (NED), the creation of a formal workforce advisory panel and the inclusion of a director selected from the workforce.
We are sympathetic to strengthening the role of employees, a key stakeholder group, as part of the governance of companies, and specifically to giving them a greater voice in the boardroom. Indeed, in our view the involvement of employees, who provide the human capital companies depend on for their long-term success, can have a wide range of positive impacts.
The representation of employees on company boards is common practice throughout Europe. We believe that the UK can learn some lessons on this from other markets while maintaining its unitary board system and wider corporate governance framework.
Based on our experience with companies across Europe, there are good and bad practices irrespective of a country’s particular governance system. We have heard much positive anecdotal feedback from directors who sit on boards with employee representation, with many citing the different perspectives they bring as a positive contribution to a more holistic board discussion and a better alignment with a company’s strategic direction. Of course, we have also come across negative experiences, although these seem to stem from particular circumstances, for example in Germany where employee directors make up half of the boards of the largest companies.
We believe that the new provision should require companies to include employee directors on their boards. Employee representation at the board level can bring valuable first-hand experience of the company’s business model and operations, particularly if the representatives work within the organisation. It will also result in much needed diversity in insights and perspectives, including on issues such as culture, customer satisfaction and executive pay. This diversity in views is particularly significant with regard to restoring trust in businesses.
Crucially, employees also have a real stake in a company’s long-term success. Employee representation should therefore lead to better relations between management and the workforce, improved employee engagement and productivity. It should enhance board level discussions and decision-making and ultimately contribute to companies that are sustainable and trusted by the public.
It is important that workforce-elected employee directors, who would also be subject to election by shareholders, should not be regarded as mere delegates of the workforce. Employee directors can never be considered independent, would always be a minority element of the total board and – critically – would be subject to the same fiduciary duty as their fellow directors, in other words to act in the interests of the company, not any specific stakeholder.
How about the other employee engagement mechanisms under consideration?
We think that employee representation is far more likely to lead to the desired impact than the designation of one particular NED as the link to stakeholders. Indeed, the designated NED employee engagement mechanism risks absolving all other directors of their existing responsibilities under section 172 of the 2006 Companies Act, while failing to change the dynamics of board discussions and decision-making.
We support the voluntary creation of stakeholder advisory panels or committees, not least to provide a point of contact for a wider group of stakeholders. However, we do not believe that they are likely to deliver the above-mentioned change at the board level, as they do not facilitate direct employee input and involvement in board discussions and decision-making.
An important caveat to the discussion of these three proposed employee engagement mechanisms is that on their own none of the three will be able to have the desired impact. While we favour employee directors, they are unlikely to be close to all the operations and the global workforce in complex and international businesses. It is therefore critical that the introduction of board level change is accompanied by new channels of gathering employee input in a variety of formal and informal ways and that this information is used by all board members.
In a nutshell, it is employee directors who, for us, are most likely to lead to the desired change at the board.
We therefore believe that the code’s new provision should require companies to add employee directors to their boards or explain why and how a different employee engagement mechanism is more suitable and effective.