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What to consider if appointing employees to boards in the UK

Pinsent Masons LLP

Growing regulatory support for requiring large UK corporations to ensure employee interests are represented to and considered by their boards may spur organisations to consider whether 'worker directors' would help provide a fresh perspective on decision making, Tom Proverbs-Garbett, Senior Associate and corporate governance specialist at Pinsent Masons explains. 

Worker directors may help provide a better link between the board and the workforce, but, importantly, they are under the same legal duties as all other directors. Issues around conflicts of interest and confidentiality may prove more complex in the worker director context.

While relatively uncommon in the UK, the idea of workers representing the interests of their peers and communities directly to boards has been in circulation for some time, gaining traction with Theresa May's bid for leadership of the UK's Conservative party in 2016 and the party's subsequent election victory.

Although the suggestion that workers must be appointed to boards would not come to fruition, the resulting corporate governance reforms, and associated consultation papers, considered the implications of workers on boards in the UK in some detail.

In the UK government's 2016 green paper on corporate governance reform, it was acknowledged that some companies already have well-developed mechanisms for listening to their employees’ views – singling out trade unions among others – and that a small number of companies had voluntarily appointed workers to their boards, with FirstGroup plc being well-known.

In its green paper, the government, while offering as an option the appointment of employee representatives to boards in an effort to strengthen the voice of stakeholders, was ambivalent about it and noted significant obstacles.

In particular, that real decision making would move from the boardroom to less formal channels; that there was a risk of tokenism; that choosing a worker representative would be difficult; and, perhaps most importantly, that the worker representative would be constrained by a directors’ duty to promote the success of the company and the confidentiality of board discussions.

This raises a fundamental question of whether boards should be cohesive governing bodies rather than forums for representatives of different interests to resolve their varied approaches.

The view of the BEIS Committee – established in its report which evaluated and considered the proposals set out in the green paper, as well as the government's eventual response – was that having a worker on a board would not fully address the issue of the company’s engagement with the workforce.

Nevertheless, employees bring a different perspective and challenge to the board, and are more likely to encourage a long-term perspective.

The Committee correctly noted there is nothing in law that prevents workers serving on boards, and a diverse board is beneficial. In the opinion of the Committee, just as the drive for women directors continues to overcome resistance, it should become the norm for workers to serve on boards.

However, it was crucial to the Committee's view that employees appointed to boards are directors in their own right.

In practice, a worker director is likely to be seen, even by the appointing board, as representing the workers alone. The law would not agree. Such a director will have to act in the interests of all shareholders, as any other director would need to do.

As the Committee put it, they must have the necessary skills and aptitudes to play a part as a full board member rather than a representative of the workforce. They would not be a delegate, but would provide the same strategic evaluation and challenge that every director should bring.

This level of responsibility, despite the seemingly focussed nature of the role, is one of the most often suggested difficulties of appointing a worker director.

Although employees still do not have a right to board representation, there is continued movement in this area. 

The 2018 UK Corporate Governance Code for premium listed companies on the London Stock Exchange introduced new measures which require greater engagement by boards with the workforce.

As the "gold standard" for UK corporate governance reporting, the Code is influential.

Large, privately-held companies and smaller listed ones which do not need to comply with the Code but for whom best-practice governance is important, may re-assess their approach to employee engagement and may now consider the possibility of having worker representatives on both their main and subsidiary boards.