THERESA MAY began her campaign speech as home secretary, cracking down on big business and the privileged few, and ended it as prime minister.
The decision by Andrea Leadsom to fall on her sword and bow out of the Conservative leadership race has given May’s comments about overhauling boardroom governance in the UK added potency.
Launching her leadership campaign, the incoming prime minister announced a policy to put employee and consumer representatives on company boards. Such a pledge would not sound out of place in a Labour leadership campaign.
The plans are indeed radical, but have some precedent in Germany where companies such as Siemens operate an advisory board that consists of 50% of employee representatives. Under the German model, which is very different to the UK, there are two boards. The management board is comprised of company executives held accountable by a supervisory board made up of independent directors and employee representatives.
Indeed, putting workers’ representatives on boards will give staff a greater sense of ownership but, for example, it could also distort how management approach employee pay – with workers having conflicting priorities. Taking the example forward, boards must consider the best interests of the business across jurisdictions. If it is in the company’s best interests to move jobs to China, an employee representative in the UK would need to support job cuts among their own colleagues, which would place them in an unmanageable position.
The plans are not dissimilar from the model suggested by John Kotter, the emeritus professor at Harvard Business School. Kotter’s prescription, suggested in 2013, is that companies need two systems operating side by side – one for management and operations, and a second for formulating strategy.
The idea behind the dual system is to reintroduce some of the conditions present when a business is in development mode, with a relatively flat structure in which everyone is happy to do anything and ideas come from all quarters.
May also wants to see annual shareholder votes on corporate pay packages binding, instead of advisory. This would go further than the measures, introduced by former Liberal Democrat business secretary Vince Cable, which forced companies to hold a binding vote on prospective pay policy at least once every three years, and an annual advisory vote on the annual report on remuneration.
A series of shareholder revolts against high pay earlier this year, including BP, Anglo American and Smith & Nephew, demonstrates that Cable’s measures have failed to curb excesses in executive pay. But government should be wary of further intervention in the relationship between companies and shareholders and the pay awards of a few hundred senior executives. This particular issue should not be used as an excuse to complicate corporate governance engagement between companies and shareholders. Indeed, the recent BP remuneration awards to its executive directors were in line with a policy already approved by shareholders.
The proposals raise some interesting questions about how big business should be governed. But as the German model demonstrates, at companies such as Volkswagen, employee reps at board level are not always able to prevent failings of governance and instances of mutual back scratching.
Richard Crump is editor of both Financial Director and Accountancy Age
Download our Whitepapers