Company boards can be improved through employee representation

This morning Policy Exchange released an excellent report that conducts a thorough analysis of the failures of corporate governance. They point out that boards can lack experience in the relevant industry, too often consist of the usual suspects of the corporate mainstream, lack independence from management and fail to hold onto institutional memory. Policy Exchange’s recommendations of providing investors a stronger say in board nominations through adopting a system similar to that used in Sweden are well worth a hearing and should be studied closely. However, there is one other area not covered in Policy Exchange’s report that the UK should think of copying from the Swedish corporate governance system. Swedish companies routinely have employee representatives on their boards.

Sweden has a unitary board system like the UK and gives employees the legal right to elect members to this main board[i]. In companies with more than 25 employees workers can vote to elect two or three members to the board. Companies covered by this legislation typically have boards where one third of board members are employee representatives. These board members have the same standing as other board members apart from on issues of collective bargaining or industrial action where they exclude themselves. Employee representation is an important part of corporate governance in many of Europe’s most successful economies from Sweden to Germany to the Netherlands. The First Group in the UK has had an employee director since the company was created in 1989 and their contribution has been described as “invaluable” by the group’s chair.

Employee representatives can help fix many of the problems outlined in the Policy exchange report. For a start employees bring a deep and technical knowledge of the industry that they work in from their day-to-day work experience. This would help inform board decisions and provide an additional perspective to candidates taken from the corporate mainstream. As the Policy Exchange report states, FTSE 100 CEOs average tenure is only 5 years but employee representatives on boards have often been involved in the industry for much longer, for example the First Group’s employee director has 36 years of experience. Policy Exchange’s report rightly focuses on the importance of independent sources of information for the board and calls for non-executive directors to visit companies and get to know employees and customers. This is yet another advantage of having employee representation on boards as they already have a good understanding of a company’s employees and customers.

Given the weaknesses that Policy Exchange have identified, it’s about time the UK’s Guidance on Corporate Governance is reformed to establish a clear route for UK companies to appoint employee representatives on boards.

Tim Stacey, Policy and Campigns Officer.

[i] This is in contrast to other countries like Germany which have a dual board system where employee representatives are appointed to the larger supervisory board.