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From back-room to boardroom: Corporate governance reform

At the start of her campaign to become Tory leader Theresa May stated she wanted to put people back in control and vowed:

“…….to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders, to non-executive directors, who are supposed to ask the difficult questions, think about the long-term and defend the interests of shareholders… as we have seen time and time again – the scrutiny they provide is just not good enough. So if I’m Prime Minister, we’re going to change that system – and we’re going to have not just consumers represented on company boards, but employees as well.”

With her feet now firmly under the table and a Conservative party conference scheduled for October, we take a look at Theresa May’s controversial proposal to reform corporate governance and put workers on company boards, and query whether this is likely to be part of the Conservative manifesto going forward.

Certainly this is not the first time this idea has been mooted in the UK; as far back as the 1970’s the Bullock report (in 1977) responding to a European Commission directive on worker representation supported the idea of worker representatives on boards, although it never came to fruition. Ironically, in light of Brexit, a large number of European countries already adopt the practice of worker representation on boards; for example in Germany under the Codetermination Act (“Mitbestimmungsgesetz”) companies with more than 2000 employees are obliged to establish a supervisory board where half of the members are elected by the employees. The idea behind the concept is to enable information to be shared more easily between shop-floor workers and the company executives and to ensure that workers have a voice.

So how does this work in practice, and how much influence do employees have? At first sight this model may seem unmanageable; however, strategically, although there are an equal number of shareholder representatives and employee representatives on the board, the influence of employees is moderated. First, the employees have to have at least one executive officer as a representative. Given this is a senior position in the company the executive officer is more closely aligned to the interests of the shareholders than to the interests of the employees; secondly, in a stalemate situation, the shareholders can overrule the votes of the employee representatives by the double counting vote of the chairman of the board (the “Aufsichtsratsvorsitzender”), who is always a representative of the shareholders.

The German codetermination model has attracted criticism recently in terms of conflict between corporate and employee interests; some organisations have also attempted to evade their obligations by engaging staff on temporary contracts in order to fall below the 2,000 threshold.

However, in the main, feedback on the German codetermination model has been positive; whilst it might seem difficult to agree on a reasonable economic strategy if the supervisory board not only consists of representatives of the shareholders but also of representatives of the employees, practice shows that overall the advantages of this kind of corporate codetermination outweigh its disadvantages.

Critics of corporate codetermination argue that the efficiency of decision making in supervisory boards is reduced as contrary interests have to be balanced; discussions with colleagues in our German office on their experience of codetermination within German businesses support the premise that there is much to be gained by letting employees participate in corporate decisions. Supporters argue that codetermination leads to a stronger identification of employees with their company and an increase in their entrepreneurial spirit. This simultaneously reduces employee fluctuation rates and internal conflicts between employees and employers, increasing motivation and thereby maximising productivity, profits and therefore employment security.

Whether a critic or supporter of codetermination in other European countries, certainly in our domestic environment the TUC has long supported and called for company boards to include workers. Whilst the TUC state that this idea has now “officially entered the mainstream” we’re sceptical as to how far in reality this will progress. Although Mrs May promised to put people back in control, business organisations may be more cautious; the CBI’s deputy director-general gave a lukewarm response to the proposals stating:

“To ensure the most effective proposals are considered, it is 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.”

With little detail around the current proposal we shall see whether Mrs May’s dramatic headlines to allow workers to take back control, become diluted as they are formed into a tangible policy. However May’s additional call for greater transparency around pay and the proposal to make shareholders’ vote on executive pay binding rather than advisory, in order to curb excessive executive pay, will no doubt add fuel to the fire in the corporate board room.

If you would like further information about the German codetermination model please contact Marcus Kissel, Partner in DWF Germany, marcus.kissel@dwf.law

 

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Legal news, views, trends and tools for HR Professionals. Stay ahead. Go further