Workers on boards: structures for increasing employee representation
The potential structures for increasing employee representation include:
- Reminding boards that they have a statutory duty "to have regard to the interests of the company's employees". This forms part of the duty to promote the success of the company (see section 172 Companies Act 2006). Companies could consider their decision making processes and consider whether they have really considered the impact of decisions on the interests of their employees. What assessment process has been used to assess the impact on employees? Have any steps been taken to mitigate that impact? No change to the existing regulatory landscape would be required. Companies could simply be encouraged to make better use of the current regime.
- Expanding the role of an existing director to include employee engagement and consultation. This structure could be modelled on the role of the senior independent director which features in the UK Corporate Governance Code. The specific responsibilities could be tailored to align with the remit of the HR function.
- An "employee representation council" (ERC) which would be separate and distinct from the board. The board would consult the ERC on any developments affecting the interests of the company’s employees. This would demonstrate that directors were discharging their duty to have regard to the interests of the company’s employees under section 172. The ERC could also be involved in the decision making process for other significant corporate decisions. This would facilitate employee input into key decisions without giving rise to concerns that an employee director might not act to promote the success of the company for the benefit of its members as a whole. The ERC could also have a reporting role and its chairman could attend and speak at the company’s AGM. Each company could set up a structure which reflected the characteristics of its own workforce and the balance between domestic and international employees.
- introducing a requirement that all companies above a certain turnover threshold consult with their employees to establish whether there is sufficient interest in employee board representation. If there was, then a company could either elect a candidate nominated by its employees as a director or put that candidate forward for election as a director at its next AGM. This could be based on existing employee consultation structures without causing significant disruption. The employee representative director would owe the same duties as all other directors.
- Creating a new category of employee director with specific statutory functions. This seems highly unlikely and is not a feature of any of the European systems which enable employee representation on boards.
Workers on boards: binding requirement or best practice?
Alongside the structural governance question, government also needs to consider whether change will be implemented through best practice recommendations or legally binding requirements. The UK’s traditional preference would be to adopt a 'comply or explain' approach. This more flexible route would allow companies to discuss employee representation with their employees without the need to comply with a rigid legal framework and without giving rise to concerns that inadequate consultation could result in penalties / fines.
The alternative would be for amendments to be made to the Companies Act 2006. A new section could be introduced requiring certain companies to appoint an employee director to the board. Initially limited to quoted companies this could then in time be extended to significant private companies.
Next steps
It would perhaps be surprising if nothing changed. When the government publishes its consultation paper we will have a clearer idea on which structure it prefers. In the meantime those interested in following this topic should read "Bringing employee voice into the boardroom" recently published by Tomorrow’s Company.
If you would like to discuss this topic please speak to your usual contact at Burges Salmon or Nick Graves.