Workers on boards was an enlightened idea - Theresa May should have stuck to it

The government has backed away from taking a bold, but sensible, step.

NS

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On becoming Prime Minister, Theresa May promised on the steps of Downing Street to govern in the interests of the many and not the few.

She pledged to put workers on company boards, acknowledging that because non-executive directors are “drawn from the same narrow social and professional circles as the executive team”, the scrutiny they offer is “just not good enough”. Fine words and good intentions, which were welcomed by the TUC.

Unfortunately, with the government’s new proposals for corporate governance reform, published today, May has missed an opportunity to put her words into practice.

Instead of introducing workers on boards, as promised, businesses will be allowed to choose from a menu of options to "engage the workforce" – none of which are up to the job.

The scandals at Sports Direct and BHS show why we need urgent and far-reaching change to boardroom culture and priorities.

Workers on company boards would raise the quality of corporate decision-making, bringing the experience of ordinary workers to bear on boardroom discussions. Evidence from other countries suggests that other board members will particularly value this insight.

Worker directors would also boost diversity in the boardroom, helping to challenge "groupthink".

What’s more, workers have a clear interest in the long-term success of their company, unlike many shareholders who can – and do – simply sell their shares when things go wrong. So their participation would encourage boards to take a long-term approach to company success.

It would also, quite simply, be the right thing to do. Workers are affected more than any other group by company decisions and deserve a say in how they’re made.

Not a veto, but a voice.

Having worker directors is the norm across most of Europe, and is associated with higher levels of research and development and employment, and lower levels of inequality and poverty. Closer to home, FirstGroup has had an employee director since its inception and describes the role as ‘extremely beneficial’.

So it’s deeply disappointing that the government has backed away from taking the bold, but sensible, step that UK plc – and its workforce and wider society – so badly need. And the alternatives the green paper does propose are deeply inadequate.

First, companies will be able to designate an existing non-executive director to "represent" the workforce on the board. This is a deeply patronising proposal which, in practice, simply allows companies to continue with the status quo.

Alternatively, companies can introduce an employee advisory council. But no guidance is given on how the council should be constituted or how members should be selected. And as it will sit below the board, it will have neither teeth nor direct boardroom voice.

Finally, companies can introduce a director from the workforce. This is the only option that’s been tried successfully elsewhere and in which the TUC has confidence. But the proposal is for just one worker director and there’s no provision for this person to be elected by the workforce, rather than simply appointed by management.

This is nowhere near what the Prime Minister promised.

Worse still, these proposals are being introduced by amending the Corporate Governance Code, enforced on a "comply or explain" basis. So companies will be able to do precisely nothing – so long as they explain this in their annual report.

One small saving grace in the government’s proposals today is the requirement for companies to report on pay ratios, using CEO total pay and average total workforce pay.

That will go a short way to improving transparency, and could place some pressure on directors to consider whether soaring executive pay packages can really be justified. The devil will be in the detail, but the provision that total CEO pay – rather than salary alone – should be used is welcome.

Workers on boards is an idea whose time has come. So at the TUC, we’ll continue to work to ensure that today’s proposals are not the last word on this common sense proposal.

Janet Williamson is the TUC senior policy officer for corporate governance. For more information, read the TUC report All Aboard: making worker representation on company boards a reality.