Guest Blog by Timothy Goodwin, Senior Associate, Winckworth Sherwood LLP
Much has been of Jeremy Corbyn’s radical announcement at the recent Labour Party Conference that a future Labour government will force companies to appoint at least a third of their boards of directors from the workforce. But it is easy to forget, amongst all the furore, that the proposals are not as radical as they first appear.
“Later this year we will publish our plans to have not just consumers represented on company boards, but workers as well. Because we are the party of workers.”
These words might sound like they come from the firebrand Leader of the Opposition, but they do not. Rather, they were spoken by Theresa May, Prime Minister and leader of the Conservative Party, during her conference speech in 2016. Some companies in the UK, such as FirstGroup, a FTSE 250 company that operates trains and buses across the United Kingdom, already has an employee director, a role currently held by Jimmy Groombridge, a bus driver of 40 years’ experience. Employee directors are common on the continent as well. For example, Germany, France, Finland, Austria, Denmark, Sweden, Hungary and Norway – to name but a few – all have laws in place that require some level of employee representation on the boards of certain companies.
There are a number of criticisms, however, of the practicalities of employee director schemes. In particular, a concern often arises as to how effective the employee directors will really be.
For example, if you have only one employee director (with the average board being made up of approximately nine members) it will be difficult for that person to have their voice heard and have any meaningful influence. However, Corbyn’s Labour appears to have already considered this point. Their proposal would ensure that a third of the board would be made up of employee representatives, giving them a proper voice without dominating the board. As Mr Corbyn put it in his statement, the object is to ensure that workers are given “a real say” in how companies are run.
This is still a long way off Germany’s regulations, which require half of the board of directors of large companies to be made up of employee representatives (but leave the Chairman, with a casting vote, as a shareholder appointee). In that context, Labour’s plan looks less like a radical departure from the norm, and more like a sensible compromise. Arguably, it represents the balance between ensuring employee directors are able to exercise some meaningful sway over the board – and, effectively, the decisions of the company – whilst reassuring businesses that managers – and, indeed, shareholders – will continue to run the show.
Another common criticism revolves around how the employee directors are chosen. Some previous employee directors have been chosen by the board, rather than the workers, leading to ‘yes men’ taking up the roles. If Labour wants these new roles to be genuinely representative of the workforce, it will have to think carefully about how they are appointed. The instinctual response will no doubt be that the employee representatives are elected directly and freely by the workers. However, a suitable compromise might be to allow the company to shortlist candidates for election – ensuring that those who might not be fit for the role (such as workers with serious disciplinary histories) are not put forward. This could represent another compromise that keeps both the unions and the business community happy.
There is also a criticism that directors tend to have significant experience of running businesses, whereas employee directors will not. That is a fair criticism but one that is easily overcome. The board of directors has a general duty to the shareholders to ensure that the company is run well. If this means that proper training a mentoring programs need to be implemented to assist newly appointed employee directors, then the board should do so. In the long run, this would benefit all directors, regardless of their backgrounds.
Whilst the proposal to force companies to adopt employee directors might seem radical, it is not as controversial as it may appear. However, both the government and businesses would need to work together constructively to ensure that the employee director roles are neither meaningless nor disruptive.