Allowing workers to sit on company boards would not only mean top executives’ pay was set at more reasonable levels, but would also encourage the long-term success of individual firms, as both employees and directors worked together in the best interests of company performance, according to two reports published today (Tuesday) by the TUC.
The TUC has long argued that corporate governance laws in the UK are missing a trick by preventing worker representatives from sitting on remuneration committees. It also sees an important role for workers on boards as a way for companies to emerge stronger from the economic crisis.
In the two reports – one looking at the European experience and the other setting out the arguments why the UK should set out on a similar path – the TUC argues that the UK’s short-termist approach (based on a model relying solely on shareholders to hold companies to account) has delivered neither economic success nor social justice.
Instead a fixation with short-term gains has led to poor productivity, low investment and wages falling as a share of GDP. This, say the reports, has had the end result of hitting demand and hurting companies in the long run.
Workers on Board – which looks at how the UK workforce might become more involved in the running of companies they work for – says that the UK’s corporate governance rules have failed to keep pace with the new world of share ownership.
With over 50 per cent of UK shares held by overseas investors, and with UK institutional investors increasingly reliant on short-term share trading as a route to profit, deciding what lies in the best long-term interests of a company can no longer be left to shareholders alone, says the report.
Instead Workers on Board suggests that involving employees in the running of companies would not only be a genuine break with the past and the UK’s failed system of corporate governance, but would also harness the contribution of people who have the long-term development of the company at heart.
Workers on Board says that countries which have included the participation of worker representatives within their company structures are also economies with higher R&D investment, better employment rates, stronger economic success and lower rates of poverty.
The report says that allowing workers seats on company boards wouldn’t be a solution to all the UK’s economic problems, nor would it mean workers having a veto on decisions.
But as it is in the interests of staff that the company they are employed by does well, and their experience will have given them vital knowledge of the organisation and the environment in which it operates, employees’ involvement could bring benefits not just for the workforce but for their employers as well.
The accompanying report, Workers’ Voice in Corporate Governance: A European Perspective, looks at the ways in which workers are involved in the management of European companies – from being a part of the top team to having a voice at annual general meetings and a seat on company boards.
The report finds that far from simply being a German phenomenon – as is the common perception – employees have formal roles to play in the management of companies right across Europe, with workers being represented on company boards in 19 European countries including the Netherlands, Sweden, France and Austria.
Both reports note that the financial crash and its economic fallout have led to an increased interest in pursuing the option of worker voice in corporate governance in the UK. Both say there’s a growing recognition of the limits, if not the failure, of the traditional shareholder model and that a new united front involving workers and managers might just be the solution to put companies on a firmer footing for the future.
Commenting on the reports, TUC General Secretary Frances O’Grady said: “Achieving a true worker voice across Britain’s workplaces is at the heart of the TUC’s new campaign plan. Seats for the workforce on company boards would help inject a much-needed dose of reality into boardrooms and put the brakes on the multi-million pay and bonus packages which are fast becoming the norm in corporate Britain.
“The move would also help put firms on a clear trajectory out of the economic difficulties many UK companies are currently facing and assist boards to focus on the strategies and investments needed for long-term company success.
“The European experience shows that involving workers in management structures is not something for UK firms to fear. Instead, it’s a concept companies should be embracing as the clamour for a more sensible, strategic approach to industrial democracy becomes ever popular.”
The reports set out a number of changes that are also needed if the UK’s system of corporate governance is to better help businesses focus on long-term success. These include:
- Directors’ duties should be changed so their main responsibility is the long-term success of the company, rather than the interests of shareholders.
- To help minimise the influence of short-term share traders, anyone holding company investments should have to do so for a minimum of two years before being allowed a vote at company AGMs.
- A mandatory system for the representation of workers on company boards. The TUC is looking at different options for putting this into practice in the UK and could help develop a network (and training) for worker representatives to help individual employees understand what would be required of them and give them the skills to take part effectively in company decision-making.