by Cydney Posner
As discussed in this PubCo post, in a speech delivered in July, the about-to-be new U.K. Prime Minister and leader of the Conservative Party, Theresa May, advocated strenuously for a number of corporate governance reforms, an approach she herself characterized as “something radical.” Among the reforms that May surprisingly championed in that speech were “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. In practice, they are drawn from the same, narrow social and professional circles as the executive team and — 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.” But, as discussed in this Compliance Week column, the idea that a Conservative PM would be promoting workers serving as directors “would once have been dismissed out of hand as outlandish—say, through the party’s 338-year history until July.” Even the platform of the opposition Labour party didn’t go quite that far.
At the outset, the authors of the CW column point out that corporate governance developments in the U.K. “have a habit of migrating before long to North America,” among them say on pay, majority voting for directors and independent board chairs. Could the concept of nominating employees to serve on corporate boards, as proposed by May, be the next governance trend to find its way across the Atlantic?
SideBar: Employee representation on boards is not uncommon in Europe. In Germany, employee representation on the supervisory board is typically legally mandated. See this article, which concludes that “prudent levels of employee representation on corporate boards can increase firm efficiency and market value.” In France, according to this article, “employee representation at the board level becomes obligatory in larger shared-based companies (Société anonyme (SA) with 5,000 or more employees worldwide or 1,000 or more in France.”
The authors speculate that May’s shocking proposal may have originated as a response to her interpretation of the catalyst for the Brexit vote— “acute public resentment not just of Europe, but of globalization, growing income inequality, and the sway and swagger of big business…. May seems to have calculated that offering her startling workers-on-boards proposal, so utterly against the character of the Conservative Party, would broadcast an emphatic ‘message received’ to angry voters. Moreover, in May’s calculus, forcing corporate boards to be more open would, in effect, help them to save themselves from mounting public hostility.” Not surprisingly, many perceive these same combustible processes to be fueling discontent in the U.S.
Now the question is whether she will actually implement that policy or “[walk] it back.” And if she does attempt to implement it, how that will be accomplished may be significant. The authors suggest that, if May opts for a voluntary approach in lieu of a legal mandate, it could be influential here in the U.S. Voluntary approaches could include a multi-stakeholder, private-sector review to determine how best to open corporate boards to consumer and employee members or a recommendation that board nominating committees determine how best to add an employee director for election by shareholders together with related “comply or explain” disclosures. The authors suggest that, if the U.K. experiment succeeds “in making boards seem more responsive, we could imagine companies and investors here giving workers’ concerns more board attention. There may be sound business reasons to do so: A review by Harvard’s Labor and Worklife Program and the IRRC Institute found that 67 of 92 academic studies detected a positive correlation between human capital management and financial performance, while 24 had mixed or no correlations and only one had a negative correlation.”
The authors note that, even in the U.S. today, there are examples of workers as board members, such as a retired UAW VP on General Motors’ board. However, they observe, “U.S. companies tend to dislike ‘constituency’ directors.” (It is frequently argued that board cohesion could be disrupted by the introduction of directors that represent narrow interests or seek to advance special agendas.) That reluctance could be overcome, they suggest, if boards are “searching for ways to break through public distrust as well as for ways to increase diversity among directors. Expanding the pool of potential directors to workers could be one way to accomplish both goals.” At the end of the day, whether a practice of nominating employees for board seats could take root in the U.S. remains an open question. While a voluntary disclosure-based approach may seem more palatable, keep in mind that, in the Financial CHOICE Act (see this PubCo post), the House Republicans are even now proposing to eliminate or substantially modify many of the governance reforms already imported from the U.K.