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Employees in the boardroom: paper published by Tomorrow’s Company considers some flexible options for companies

Much has been written in the press about the Prime Minister’s statements on corporate governance and, in particular, on plans to have worker and consumer representatives on boards, which she referred to in her speech at the Conservative party conference on 5 October and during a press conference on 5 September at the G20 summit in China, among others.

Theresa May indicated that government proposals on corporate governance reform would be brought forward in the autumn and so a consultation is expected shortly. Separately, the Business, Energy and Industrial Strategy House of Commons Select Committee launched an inquiry into corporate governance in September, the terms of reference of which included examining if there should be worker representation on boards and remuneration committees and, if so, in what form.

Tomorrow’s Company has made a further contribution to the debate on worker representatives on boards in its recently published paper: Bringing employee voice into the boardroom. It states that the intention is to start a pragmatic discussion on how companies can increase the employee voice within governance structures in a way that helps build public trust and supports the long-term success of business.

While explaining that further work would be needed to work out specific details, the paper proposes two models of employee representation at board level for companies to consider that are intended to offer flexibility for different cultures and organisational structures, ownership and international operations.

The paper is interesting because it reiterates that proposals on employee directors should not be considered by the government in isolation and that any reform should reinforce the principle of the unitary board and the indivisible nature of directors’ duties, emphasising that directors owe their duties to the company and are not representatives of interest groups.

It proposes that the government takes a flexible approach to strengthening the employee voice, which would also be in keeping with the UK’s tradition on corporate governance. The paper does not consider the position of consumers at this stage and recommends that, before the government settles on any changes in arrangements for employee directors, it works out its position on other stakeholders and on the effectiveness of section 172 of the Companies Act 2006.

It recommends that any reform considered by the government should not just apply to listed companies but to UK companies with more than 500 employees working in the UK, regardless of ownership structure.

Broadly, the paper proposes two options:

Option 1: Employee directors on the unitary board

The first option would allow companies to incorporate employee representatives as insiders within governance structures by introducing them on to the board, having the same legal duties and responsibilities as other directors, and therefore owing their duties to the company rather than to employees. The election of employee directors could take place in one of three ways:

  • Direct election by employees in the same way as employer’s pension scheme members elect their representatives. Employee representatives could be elected straight to the board (requiring more significant change to UK company law) or via an election process among employees that nominates the employee representative to the board who is then appointed within the current system of a shareholder vote at the AGM.
  • Appointment by an employee advisory panel that is, in turn, elected by employees. The paper indicates that this may be more suitable to a company with diverse operations where it may be difficult for a single representative to represent the whole workforce.
  • Appointment by an employee ownership trust that has a significant shareholding in the company held on employees’ behalf. As the representative would sit on the board both as an employee representative and a significant shareholder, the paper suggests that this could help to align the interests of employees and shareholders.

Option 2: Employee advisory panel

The second option would give employees a channel of communication and challenge using a structure outside of the board by introducing an elected employee advisory panel. The paper proposes that companies would have flexibility on how to implement an advisory panel, provided it met the following criteria:

  • A mandate to make a public statement on the key issues facing the company each year, which is then published in the annual report and on the company’s website.
  • Formal channels of communication to the board and the right for the panel to present a summary of its conclusions at the company’s AGM.

The paper suggests that, as many companies already have employee or stakeholder advisory panels in some form, these could be adjusted to meet the requirements for improving employee voice in some cases.

Companies with more than 50% of employees in the UK would be required to demonstrate employee voice at group level and those below 50% would be able to demonstrate employee voice at the UK subsidiary level, most likely under the second option. A transition period of two years is recommended, during which the principle of “comply or explain” would apply while companies experiment with either option proposed.

Action point for companies

If the forthcoming government consultation does contain proposals for employees on boards, companies may benefit by starting to consider the practicalities of workable options now. Companies should also begin thinking about current good practices that may already exist within the business on engagement and representation of employees, which could be adjusted to further strengthen the employee voice at board level.

Practical Law Caroline Pearce

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