Workers get elevated

Theresa May has suggested employee representatives should join the boardroom but would this work in practice?

Mick Barker has worked on the railways for 40 years as a train driver on one of the UK’s busiest routes. These days he spends much of his time touring bus depots across the country at 5am in the morning, pressing his mobile number into the hands of 25,000 drivers. The 57-year-old FirstGroup worker happens to hold an unusual position in corporate Britain: he is one of only a handful of employee representatives on UK boards.

Suddenly, Barker finds himself the focus of scrutiny outside the ranks of FirstGroup, since one of the new Prime Minister’s big ideas is putting people like Barker on the boards of listed companies.

Since the financial crisis, capitalism and the corporate world seem to have lurched from one scandal to the next. From the failure of Royal Bank of Scotland under former chief executive Fred Goodwin to the collapse of BHS, after former owner Sir Philip Green sold the high street chain to a three-times bankrupt for a single pound, the corporate world has lost the trust of most ordinary people which is presumably why a Conservative Prime Minister can propose reforms that would have been viewed as radical from a Labour leader.

But Sarah Wilson, a campaigner for higher standards of corporate governance and founder of Manifest, the shareholder information service, says that Theresa May’s plan for what looks like radical reform ‘still took everybody by surprise’. Wilson is hopeful that people will not dismiss the idea as unworkable because she believes there is a need to broaden the circle of people from which executive directors are recruited and thinks that some big institutional shareholders are also in the mood for change.

‘Companies are facing complex challenges and these are not just about access to finance. It was absolutely amazing to hear a politician put corporate governance at the centre of a political speech,’ explains Wilson. ‘Clearly there is a pipeline problem when it comes to boardroom diversity. For many years, non-executive directors of a certain calibre and experience have been put forward for positions and this must change. To coin a phrase, boards are ‘pale, male and stale’. They are reflective of one constituency only, the City, and not representative of other stakeholders such as consumers and employees.’

Wilson identifies a rift between traditional institutions and those who are more open to new ideas, particularly regarding board make-up, such as Nest, insurer Aviva, Legal & General and Royal London Asset Management. Interestingly, one of the Prime Minister’s first actions was to appoint John Godfrey, corporate affairs director at Legal & General, as her director of policy.

While almost no FTSE 100 company wanted to discuss Theresa May’s ideas – preferring to decline to comment on something that is only at ‘idea’ stage – the off-the-record business reaction has been negative.

‘The Conservatives are being bombarded with the message that this is not a good idea, albeit not through official channels,’ one spinner says. While another financial PR man would say only: ‘All my clients are completely bemused by it.’

In the UK, putting workers on boards is viewed as bureaucratic and even outlandish. But it is standard practice in 19 countries in Europe, including Germany, the continent’s strongest economic power, where it has been happening for 40 years.

One senior executive from a UK based company with significant operations in Germany, explains: ‘It seems to work quite well. The employee voice is a sanity check. When something is proposed to a board, they can say what works and what doesn’t. ‘The most powerful aspect [of co-determination] is that companies can’t take decisions about lay-offs without having first consulted with employee representatives. This helps to make sure that employees are being heard from the lower levels.’

Warren East, chief executive of Rolls Royce, recently told reporters at the Farnborough Air Show that the engine manufacturer was happy with its experience of having workers on boards in Germany. ‘We have quite a bit of experience of this with our activity in Germany. We have been successfully operating this model in Germany for the last 20 years or so. In practice, even in the UK where we do not have that, the reality is that we do an awful lot of consultation with union representatives and Rolls Royce has a high represented workforce, so we are pretty used to dealing that way and I actually think that it is a sensible way of keeping our workforce onside.’

However, George Trefgarne, founder of financial PR and communications firm Boscobel Partners, is not convinced and points to the recent scandal at Volkswagen as an example of how worker representation has not prevented governance lapses.

‘The evidence from Germany is that workers either become effectively executive directors who don’t hold the executive to account or see themselves as nonexecutives accountable to the unions or other stakeholders, who are not seen as trustworthy or useful by other board colleagues,’ he argues. ‘The PM is entirely right to focus on the reform of capitalism but she should examine a board’s conduct and behaviour rather than its composition.’

The idea of putting workers on boards causes more alarm in some quarters than others. A corporate affairs director from the banking sector says: ‘Financial services is a highly-regulated industry and all board directors have equal responsibility and equal liability. That means the consequences of ‘getting it wrong’ for board members of financial services companies is onerous. That’s why both regulators and companies want directors who have the capabilities and experience to understand many of the technical aspects of the business that underpin those responsibilities.’

Meanwhile the Financial Reporting Council, which polices corporate governance through a voluntary code, sounds more sympathetic to the idea of putting workers on boards than it has been in the past.

Its chairman Sir Win Bischoff says that if Parliament decides to legislate then ‘it can be accommodated’, adding: ‘Culture is an attitude that boards need to have. Perhaps we have focused too much on financial performance and the strategy that gets us there, rather than on wider aspects that boards should be involved in.’

Sir Win’s concern, however, is that employee directors might concentrate too much on issues of pay, rather than considering wider business and strategic aims. 

Oliver Parry, head of corporate governance at the Institute of Directors, also sounds far more encouraging than might be expected. ‘Placing workers on boards can bring benefits in terms of better employee engagement, and we would urge companies to consider doing so, although we would stop short of making it compulsory for firms.’

He added that: ‘The EU Referendum campaign was very bruising for businesses, and exposed a clear gap in public trust. It is now in everyone’s interest for that trust to be rebuilt.’

But the CBI sounds less enthusiastic. A spokesman said: ‘Asking how to achieve better employee engagement is the right question. Firms up and down the country, and across the sectors, are committed to engaging their employees in a huge variety of ways. To ensure the most effective proposals are considered, it’s important that issues – such as putting employees on boards, whether they would need to sit on the full board, and how they would use their voting rights – are discussed between the Government and business.’

But for all the CBI’s caution there are some very successful businesses in the UK that have been listening closely to employees for many years. FirstGroup’s commitment to employee directors stems from the founding of the company in 1989, with a management led employee buy-in.

When the company went public in 1994, the employee director role was written into its Articles and since the business has grown through buying other companies, the number of employee directors in its subsidiary businesses has grown.

In a 2013 report for the TUC, the then chairman of the group, Sir Martin Gilbert, chief executive of major investors Aberdeen Asset Management, said: ‘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.’

Another well-known British company has also made clear that it intends to get closer to key stakeholders, especially customers. Marks and Spencer’s new chief executive Steven Rowe began his tenure by saying that the retailer had ‘entered a new era that would be committed to our customers’.

The retailer began this process in the spring by asking key stakeholders to come in, see and comment on its Autumn/Winter range. ‘That resulted in feedback that informed some of our buying decisions,’ says spokeswoman Clare Wilkes.

Executives felt the initiative had been useful and at the company’s annual meeting in July announced that they would create a shareholder panel that would inform the board and advise on its turnaround strategy. ‘With you on our side we will grow our business,’ Rowe told the room of shareholders.

Speaking two weeks after the annual meeting, Wilkes said that the retailer had been swamped with customers also wanting to be part of an advisory panel. It now plans to create a shareholder panel and a customer panel, to capitalise on the interest.

‘These changes are possible because we have a new chief executive that believes that engagement [with customers and shareholders] is really important and that transparency in our business should be at the heart of everything we do,’ Wilkes says. As far as representing workers’ views to the board, Marks & Spencer will continue to hold lots of opportunities for its staff to put forward their views and help shape the business. It is not overly worried by the prospect of legislation that will require it to put workers on boards.

Ian McVey, the UK director of Qualtrics, a customer and employment engagement specialist, says that failing to capture employee and customer insight, and give it a voice at board level, is a business risk.

McVey says: ‘Social discourse has liberated the customer and employee. Each is as keen to share opinion in an effort to make things better, but only when it is equipped to listen can management react, and base its competitive strategy on solid learnings, not just guesswork.’

He advises that firms must begin to include and engage employees and customers consistently, not just when they complain or, in the case of workers, around annual appraisals.

Another successful British business that is committed to giving workers a boardroom role is the John Lewis Partnership, owner of Waitrose and John Lewis. As an employee-owned organisation, John Lewis has five employees (or partners as it calls them) on its partnership board which meets 11 times a year.  The board’s tasks include approving the partnership strategy, determining the annual partnership dividend or bonus, approving the chairman’s pay and approving the chairman’s successor.

Simon Fowler, director of communications at John Lewis Partnership, who has himself served as an elected representative on the partnership board, says: ‘The conversations that you have on the partnership board mean that the view and the voice of partners is properly heard. Those that are elected are from a wide spectrum and are often not from a management grade.

‘There is a real sense of collective decision making. The appointed directors get to hear real insights from the elected directors. Conversations reflect thinking about long-term sustainability and the impact and reasons for change.’

John Lewis Partnership’s unusual employee democracy stems from its formation and the values of its founder. Its governance structure has been altered over the years but was first written in 1929. However, Fowler argues that other companies could learn from aspects of the JLP model.

‘Having a mechanism where employee voices are heard at the top means we take better decisions that are focused on longer-term success and don’t take short-term measures that ignore the needs of those working in the business.’

Arguments like these appear to have won over the new Prime Minister. Corporate Britain may find that if it is not willing to fall into line, it will be compelled to.