Earlier this year, Theresa May made it clear that she expects to "see changes in the way big business is governed". She suggested that employees should be represented on company boards.
After some initial scepticism the idea of employee representation on company boards may be gaining support. At least one UK listed company has had an employee director on its board for quite some time.
So what are the challenges and what are the barriers to this working in practice? The biggest may simply be that employees will in practice not be that keen on the idea. Some of the more technical and practical aspects are considered below.
- Would this be a legally binding obligation on quoted companies or a best practice recommendation?
- How would the employee director be selected? There are formal mechanisms in place for electing employee representatives when consultation is required. Perhaps those could be adopted for this purpose.
- Would an employee director be appointed by the board and then be subject to election by shareholders? There seems to be no reason why a different approach should be taken or a special regime created.
- Should an employee director have any special duties and responsibilities? No. If this idea is to work in practice it is important that all directors have a duty to promote success of the company rather than to safeguard the interests of a special interest group.
- How would the employee director manage any conflicts which arise as a result of his position as a non-executive director and an employee?
- What happens when the board meets to discuss industrial action, restructurings or executive severance? How can confidentiality be maintained whilst the board develops its plans.
Some more technical issues are likely to arise as the concept of an employee director will need to be considered in the context of the UK Corporate Governance Code. For example:
- How would the selection process for an employee director fit with the provisions of the UK Corporate Governance Code dealing with appointments to the board (Main Principle B.2 and Code Provisions B.2.1. to B.2.4.)?
- An employee director could not be treated as an independent director for the purposes of the UK Corporate Governance Code. Would changes to Code Provision B.1.1. be required?
Some difficult issues may need to be considered in the context of quoted companies subject to additional regulatory regimes.
However few if any of these issues will represent a barrier to employee directors becoming more widespread in the UK. The concept has been around since 1989.
This article was written by Nick Graves, Partner at Burges Salmon LLP. For more information, please contact Nick Graves.
