Workers on Board! Workers’ voice in corporate governance
The TUC has published two reports on workers’ voice in corporate governance.
The financial crisis has exposed the weaknesses of the UK’s corporate governance system and its reliance on shareholder engagement as the main discipline on company boards. The failure of shareholders to prevent a series of decisions by banks and other financial institutions that have proved disastrous for the banks themselves, their staff and the wider economy has demonstrated that shareholders cannot be relied upon to encourage companies to focus on long-term sustainable success rather than seeking short-term gains.
As set out in Workers on Board the case for workers’ voice in corporate governance, the UK’s corporate governance system has not kept up with developments in the world of share ownership.
Institutional investors such as pension funds and insurance companies hold highly diversified portfolios of hundreds if not thousands of shares; it is simply not possible for the staff of these organisations, however dedicated, to engage effectively with all the companies whose shares they own over all the issues for which shareholders are ultimately responsible. They also hold a much smaller proportion of the UK stock market than was the case just fifteen years ago: UK pension funds and insurance companies combined now own less than 11% of UK shares, down from over 40% in 1998. In contrast, over 50% of UK company shares are now held by overseas investors, whose ideas about how companies are run may be informed by their own national context rather than that of the UK.
An additional problem is the increasing reliance of investors on share trading to generate financial returns , rather than taking a long-term approach to share ownership. The interests of share traders lie in short-term fixes to raise company share prices, rather than long-term strategies to foster sustainable organic growth. There should be no role for short-term share traders in corporate governance.
The interests of workers, on the other hand, lie in the long-term success of their company. It is workers who bear the greatest risk in times of company failure, as they invest their labour, skills and commitment in the company they work for, and unlike shareholders cannot diversify this risk. Putting workers on company boards would help boards to prioritise investment in long-term company success, rather than being distracted by short-term financial engineering, as occurred in the financial sector in the run up to the crisis. Workers bring with them in-depth knowledge of their company and the environment in which it operates, making them well-placed to contribute to strategic and operational discussions that are central to board decision-making.
Indeed, research shows that countries with strong workers’ participation rights score more highly on a range of important measures, including R&D expenditure, employment rates and educational participation among young people, while also achieving lower rates of poverty and inequality.
As Workers’ Voice in Corporate Governance A European Perspective shows, workers have the right to be represented on company boards in 19 European countries, including many of Europe’s most successful economies such as Germany, the Netherlands, Denmark and Austria. Significantly, workers are represented on company boards in countries where companies have a single ‘unitary’ board of directors such as Sweden and Ireland, as well as in countries like Germany that have a two-tier or supervisory board system. Other mechanisms for workers’ voice in corporate governance also exist, including worker representation at Annual General Meetings and worker involvement in the selection of the top management team. The UK is in a minority of European countries with no provisions for workers’ participation in corporate governance.
While many UK companies remain wary, where it has been tried it is popular. Martin Gilbert, Chair of FirstGroup which has had an employee director on its board since the company was established in 1989, says
The presence of employee directors on the FirstGroup board is invaluable. The few drawbacks are greatly outweighed by the benefits and having this two-way channel of communication has positively impacted on the running of FirstGroup.
A survey of Swedish company chairpersons found that 69% thought that worker board representation had a positive impact on their company, while just 5% described it as negative.
Workers on Board proposes three significant reforms:
- reform of directors’ duties so that directors’ primary duty is to promote the long-term success of their company rather than prioiritising shareholder interests as at present;
- making shareholders’ corporate governance rights dependent on a minimum period of shareholding of two years; and
- establishing a mandatory system for the representation of workers on company boards.
Workers’ representation in corporate governance is an idea whose time has come. So what are we waiting for?