Jonathan Exten-Wright, partner at Employment & Pensions group at DLA Piper, explains what the new Government proposals mean
The Government recently published its consultation response on how to improve the UK’s corporate governance framework, taking into consideration the House of Commons BEIS Committee’s recommended reforms made in April this year.
The proposed measures aim to strengthen corporate governance through mostly non-legislative means, including making changes to the UK Corporate Governance Code, and the response sets out nine headline proposals for reform across three specific aspects of governance. These are: executive pay; strengthening the employee voice, customer, and supplier voice; governance in large privately-held businesses.
Directors will need to understand what these proposed measures might mean for them, namely what strengthening the employee voice mean in practice.
Strengthening the employee voice
The consultation response notes a groundswell of support for businesses operating in a way which recognises their responsibility to the people who work for them. This also reflects the Taylor Report on Employment Practices in the Modern Economy. To this end, the response proposes –
- Introducing a legislative requirement on all companies of a “significant size” to explain how their directors comply with the existing requirement, under section 172 of the Companies Act, to have regard to employee interests in pursuing the success of the company. The suggestion is that this requirement should affect employers with 1,000 plus UK-based employees, but this remains subject to consultation.
- Production of joint guidance by the Governance Institute and Investment Association on practical engagement by companies with their employees.
- Development by the FRC of a new principle in the Corporate Governance Code establishing the importance of strengthening the voice of employees. As part of this, premium listed companies will be required to adopt, on a “comply or explain” basis, one of the following three employee engagement mechanisms:
- A designated non-executive director
- A formal employee advisory council, or
- A director from the workforce.
The consultation response contains no detail on these options which, instead, will be left for the FRC to develop. What are potential pros and cons of each?
Director from the workforce
Placing a single worker on the company board is unlikely to address fully the issue of company engagement with the workforce. Companies that choose this approach may risk accusations of tokenism. In addition, one individual could find it difficult to represent the interests of a broad spectrum of employees in different roles, at different levels of seniority and in different locations, despite the general duty of all the directors. This may lead to pressure for a greater number of workforce representatives.
The Government’s consultation response clarifies that this will be a formal statutory director’s role. Accordingly, any such individual will have to be involved in all board decision making and be given all the information necessary to enable them to comment meaningfully on matters under discussion. Where other board members are reluctant for a workforce representative to be involved in this way, there is a risk of transparency being adversely affected if real decision making moves away from the boardroom.
Moreover, the workforce representative will be subject to all the statutory and fiduciary duties of a director. Arguably, this may reduce their effectiveness as they will be constrained by their duty to promote the overall success of the company and by the confidentiality of board discussions. This will have to be carefully managed as the workforce director will want to inform employees of relevant developments. A suggested solution may be for the board to note representations made by the workforce director and make these available to all staff once their release is no longer prejudicial, together with an indication of how those views were taken into account.
Designated non-executive director
This approach is akin to the Dutch worker representation model where individuals are recommended for board membership by the works council. Those recommended are usually independent professionals, such as academics or judges and, once appointed, they are a full board member. As such, again their primary duty is to have the company’s interests at heart.
Many of the issues related to workforce directors (above) also apply to this model. In particular, there remains the risk of a conflict for the individual director seeking to fulfil the role of employee representative while at the same time meeting their other wide-ranging directors’ duties. Board decisions on pay, site closures or large-scale employment disputes are all topics where company and employee interests may conflict.
On the plus side, however, if the Dutch approach of external labour relations experts takes hold in the UK, a company’s board may gain the advantage of a member who has skills and knowledge relevant to their business as well as empathy with the workers. In addition, the distance in the relationship between an external non-executive and the workforce may possibly lessen the concern of board members about their involvement in the full range of board discussions.
Formal employee advisory council
This is the approach to worker consultation taken elsewhere across the EU in, for example, Germany and which holds a number of advantages over the other models. For example, an advisory council member –
- will be able to represent the views of the workforce without having to balance the wider competing interests of the company
- will not need to be privy to the full range of business confidential or strategic information
- will not be subject to the complex web of directors duties and at risk of breaching those.
In addition, this option allows for a range of individuals to be appointed to represent different locations and roles across the business.
On the downside, employees may feel that without a seat at the “top table”, their views are not genuinely being taken into account by the board. To overcome this risk, where the employee council provides a view, an option would be for the board to give reasons for any decision made in light of those views.
Although the timeframe for the implementation of these reforms is unclear, and many companies may feel daunted at opening the prospect of board level employee representation, reassessing employee engagement structures now will undoubtedly be beneficial in the long run.
By positively engaging with these issues now, including an evaluation of the practical and legal considerations, companies can develop a better understanding of what measures they need to take and by when.
Jonathan Exten-Wright, partner at Employment & Pensions group at leading global law firm, DLA Piper.