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Exec briefing: Employee representation – coming to a board near you…

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Jonathan Exten-Wright considers the options available to UK corporates if boards are compelled to include worker representation

FOLLOWING AN EARLY INDICATION by Theresa May that a review of UK Corporate Governance is on her policy agenda, the Business Innovation and Skills (BIS) Select Committee has recently announced an inquiry looking at executive pay, director duties and the composition of board rooms, including worker representation and gender balance.

While much of the review concerns the effectiveness of existing corporate governance regulation, a novel aspect is worker representation on company boards. Such representation on remuneration committees was considered by the Coalition Government in 2012, but never took off. Since then, this is the first time that employee representation at board level has been formally reconsidered.

Common practice?

Looking at Europe, fourteen of the 28 EU member states and Norway have rights for workers to be represented on company boards. These should be considered, regardless of the Brexit vote, if the UK is to suggest such provisions. Few UK companies have voluntarily made arrangements for employee board representatives, although more may now look to do so.

As an example, one organisation which has a voluntary arrangement describes it as “invaluable,” suggesting that the two-way communication channel has positively impacted on the running of the company. Others envisaged benefits such as shifting from a short-term, corporate focus on shareholder interests, to an emphasis on wider “stakeholder” interests and long-term success of a business. Despite existing director accountability for this, the level of employee participation is heralded as having a positive impact on productivity and profitability.

However, challenges include disclosure of confidential business plans, potential conflicts of interest, inadequate skill levels of employee representatives and the imposition of a potentially bureaucratic obstacle to efficient management decisions.

Looking at practicalities, a number of questions arise, such as which types of companies would be required to comply (private, publicly listed or of public interest?) and whether the requirements would be legislative or part of a corporate governance code.

Proponents must also consider how many employee representatives are “sufficient”, how to determine who they were and how to properly appoint them. Would an employee representative bear the full responsibility as a director? Would this be permanent? Would their obligations be the same, particularly in terms of confidentiality?

Options from Europe

European examples suggest there are a variety of options to consider. In five European countries, workers already have limited rights in state-owned or privatised companies.

Germany has highly evolved worker representation laws. Larger companies mandate employee representation on the supervisory board (which scrutinises the running of the company by the executive board). For those companies with over 500 employees, 33% of the supervisory board members must be worker representatives and for those with over 2,000 employees, it must be 50%. Representatives are elected by the workforce and often are existing trade union or works council representatives.  Bound by a statutory duty of confidentiality, they have the same rights and duties as other supervisory board members.

Alternatively, the worker representation regime in The Netherlands is arguably somewhere between the German regime and the UK’s current absence of a regime. Here, larger companies have either a two tier board structure or a one tier board with non-executive directors. The works council has a right to recommend one third of the members of the supervisory board in a two tier structure, or of the non-executive members in a one tier structure. Unlike Germany, the recommended individuals are not company employees, but independent professionals such as academics or judges. Shareholders can reject a works council recommendation, but rarely do so. Once appointed, the individual is a full supervisory board member and their primary duty is to have the company’s interests at heart.

Where next?

The new prime minister clearly believes there is an urgent need to address corporate governance in the UK. Whatever the new provisions are, businesses must accept that change cannot just be on the surface.

 

Jonathan Exten-Wright is a partner at DLA Piper

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