Employee Representation on Boards: Meaningful reform or a palatable policitcal response?

Theresa May has reignited the debate about whether boards should have employee representation. This will be similar to the practice on the continent in countries such as Germany, where worker participation is the norm in larger companies.

It is a response to tackle what many see going on in the corporate world as corporate greed, self-interest, malpractice and the like. Employee representation can help tackle this problem of immediate profit above all else by putting stakeholder interests at the heart of the company's decision making, referred to as the 'relational company' model. To this end, it is hoped we would see far fewer instances of the 'unacceptable face of capitalism'.

This is not all, it is part of an ongoing trend in company law reform to shift the burden from the state to internal measures to remedy corporate misfeasance. By placing control and decision making in the hands of those interested in the company they can rectify and/or remedy instances of corporate failure internally without the need for state interference.

So will employee representation really bring an end to profit above all else and radically reform corporate law? Here are some considerations as to why I think that answer would be 'no'.

One must first begin with 'what is the company'. It is a separate legal entity. It is the same as you or I are, legally speaking. Its differences are only practical. The same could be said of two natural persons, whereby legally they are treated the same as individuals but consist of practical differences. The end result is that the law seeks to adapt to those practical differences to remedy any potential unfairness whereby those practical differences cause an imbalance in any relationships one holds with another party. For example, a parent and a child are legally treated the same as individuals but hold practical differences. So when the two individuals engage in a relationship the law responds to account for those practical differences between the two individuals i.e. through aspects of family law.

Therefore, a company is able to own property, enforce its legal rights, have legal rights enforced against it and so on just as any other individual. But it cannot do this itself due to its practical limitations. It has no eyes to see, no ears to hear, no hands to write. It requires individuals to act for it. The right to do so is traditionally given to the directors. The right is derived from the company's constitution. Therefore it is the company, exercising its right, to allow another to act for it. Again, this is no different from, say, a natural person who does not have the capacity to act and requires someone to act for them, such as an individual with a severe disability.

So, how does the law respond to the practical differences where one is required to act for another? Anyone who undertakes to act for another's interests is recognised as owing them duties. A trustee will owe duties to beneficiaries. A director owes duties to the company. Equity imposes these duties to ensure the power the person has over the other is exercised in a manner society deems as 'proper'. In most instances this involves four key duties: 1) proper performance; 2) best interests; 3) care and skill; 4) loyalty. Arguably (1) is not a duty as it is simply an interpretation of the powers given to determine if they were exercised for the purpose given. But I do not want to get side tracked...

Therefore, the individual acting for the other, in this case our director, is acting in the other's interests, the company. Here we have the first issue with a relational model of the company. If one is to put the interests of the stakeholders at the heart of decision making, the law will only allow you to do that insofar as it is in the best interests of the company. Otherwise it would be treating the company differently from a natural person, which is not allowed. You could not legally force the company to put the interests of the stakeholders at the heart of the decision making process because it is tantamount to someone telling a natural person to put another's interests at the heart of their decision making process. The governance reform would then have no legal teeth. The law requires the directors to put the company's interests at the heart of the decision making process, not the stakeholders.

This then leads to the second problem. With its one-tier board the UK imposes the same duties on every director, whether they are an employee representative or not. Therefore, an employee representative can only put the employee's interests at the heart of the decision making process where it is in the interests of the company to do so. This further leads on to how an employee representative will be incentivised. The current remuneration packages of directors are all based on profit metrics that favour a shareholder-centric model of board governance. If employee's are incentivised in the same way, agency theory would tell us that they would only prefer the employee's interests as long as it favoured their own. If they are incentivised the same way as other directors, group-think would undoubtedly set in, as relying on the representative to make the decisions in the employee's interests where they stand to gain by making decisions against them is going to cause a considerable conflict of interests. The alternative is to incentivise them differently, which would artificially create a two tier board, which may very well cause division and split on the board rather than unity and cohesion.

This also shows that in the UK, we technically do have employee representation on boards already. The board are required to act in the company's best interests. What is the company's best interests will often involve a consideration of the effect decisions will have on stakeholders. But this is only one consideration for the board, as it would be for you or me when we make decisions. Ultimately it comes down to what is best for the company, but to legally require anything else would be a major shift in the way the company is perceived and treated.

The UK approach to the company is pragmatic. The company is a separate legal entity and anyone acting for it has to put its interests first to account for its practical limitations. It shows that May's proposal is a palatable political response in an attempt to shift company regulation away from the state to internal measures by giving workers a voice on corporate boards. The end result is that when the next corporate scandal hits, government can blame the company rather than the system. However, this shows that the governance reform is unlikely to do much to change the way a company is run and for whom because the law would not facilitate this change. If you want to less of the unacceptable face of capitalism, May needs to recognise the company as a separate legal entity and take measures to strengthen the rights of those involved with the company i.e. special legislation on zero-hour contracts; enforcing existing employee rights; easier means to enforce consumer rights; better standards on environment pollution; better standards on community projects and infrastructure. Simply expecting all these things to happen by putting an employee on the board and doing nothing else is beggar's belief.

A final thought is that developing employee representation in the UK on the basis of analogy, overlooks the corporate governance failings those jurisdictions have seen. It was only last year the Volkswagen scandal broke. No amount of employee or stakeholder representation stopped what the legal rules did little to prevent. Governance reform is not meaningful reform. If you want change you need to make it in the individual's interests to chose that method of behaviour. Plastic bags, smoking, alcohol, even Pokémon Go are recent examples of modifying behaviour and none of these changes relied on just telling people to behave in a different way.