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How Theresa May’s vision of employee representatives on UK company boards might be realised

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The concept of employee representation at board level is not unusual in continental Europe but has not been aired seriously in mainstream UK politics since the 1970s. For such a suggestion to have come from a Conservative prime minister leading a government which is intending to take Britain out of the EU makes it all the more noteworthy.

It is important however to take Theresa May’s comment in context. She set out this idea in a speech intended to kick start her campaign to become leader of the Conservative Party, not as prime minister. She has not reiterated the suggestion since taking office and this is not, at present, a party proposal.

Is employee board representation an anathema to English law?

Whilst employee engagement is embedded within many continental European corporate regimes, the notion of employee representatives on boards cannot easily be reconciled with English law. 

A director cannot sit on a board to represent the views of a constituency. Directors are not like members of parliament. Each director must always act in the way they consider, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. This means that a board decision of a commercial entity that plays to the interests of employees or the wider community can only be justified if it also serves the interests of the shareholders. Shareholder interests are invariably economic.

For instance, a company proposes to move labour overseas in order to increase shareholder returns. If a board member who was also a non-management employee opposed this motion, it would be difficult to convince the remainder of the board, or the shareholders, that such a vote was cast with the shareholders’ interests principally in mind, and would most likely amount to a breach of their statutory and fiduciary duties.

Another duty of a director under English law is to avoid situations where that director has a direct or indirect interest that conflicts with the interests of the company. For the same reasons as noted in the above example, the interests of the company will not always align with that of its employees. Conflicts of interests can of course be authorised by other directors and so this presents less of a legal hurdle, but it does raise questions about “good governance”. 

The UK Corporate Governance Code (the “UK Code”) suggests that the boards of public companies should be comprised of a majority of “independent” non-executive directors. Employees automatically fail the current test of independence as set out in the UK Code. To cope with this, boards would need to increase in size to maintain the independent majority, cutting against the progress that has been made in the last 25 years in creating small, effective boards. 

The presumption that boards are able to act independently has been weaved into the tapestry of English law and is not easily aligned with the concept of employee board representation. If the UK is to replicate its European cousins and create a governance model involving employee representatives at board level (as found in countries such as Germany, Austria, France, Denmark and Sweden) it will be necessary to re-cast many of the fundamental elements of English company law and practice.

Employees, employers, unions and good governance

Theresa May’s suggestion has received a rather frosty reception from business. Would employee board representation slow down, further politicise and complicate corporate governance? Presumably Theresa May thinks it would improve the quality of corporate decision making and reduce the risk of tension between employers and employees. Another potential issue is whether conversations in the boardroom would become more or less open. 

In these uncertain times it should also be asked whether the UK should risk deterring investors by imposing upon itself the same bureaucratic shackles it has averted at a European level through the negotiation of various company law directives. Why would a Brexit government seek to blunt the UK’s competitive edge against our continental competitors?

Nevertheless, and whatever the objective, it is notable that the suggestion may lead to greater board diversity and create new direct communication channels between employees. 

Ultimately, however, good corporate governance is built upon ensuring that an effective and accountable board operate within a transparent management structure where the concerns of shareholders are considered through the wider lens of other stakeholders, employees and our society as a whole. Volkswagen AG has demonstrated that a public company with a representative supervisory board can show a seemingly remarkable lack of governance, risk management and supervision.

Edward Craft is partner and Edmund Goodin is solicitor in the corporate team at Wedlake Bell.

Fostering the right culture is critical in establishing effective governance, risk and compliance within an organisation. Learn how to do so with these seven steps.

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