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.

Derivative Claims data

Since September I have been working with the Eastern Academic Research Consortium (EARC) as part of my Quantitative Skills Award from the British Academy. We have been working with a dataset I have collected on derivative claims under common law and statute.


The dataset consists of 46 cases looking, generally, at whether the reform of the derivative claim under the Companies Act 2006, part 11 is meeting its objectives, such as allowing claims to continuing in appropriate circumstances whilst dismissing frivolous claims, and whether there is practical convergence of shareholder protection in a sense of whether the UK will see more private enforcement of directors' duties in public companies.


Below is some of the descriptive frequency data from all of the cases observed under common law (27 cases) and statute (19 cases). Arguably there are 4 time periods for 'derivative claims' but this data is simply split in to two, common law and statute. Those four periods are: 1) 1843-1950; 2) 1950-1982; 3) 1982-2008; 4) 2008-present. The first period was Foss v Harbottle (1843) 67 ER 189 recognising majority rule but subsequently the need for exceptions. Up until Edwards v Halliwell [1950] 2 All ER 1064 when this case recognised categories of exceptions, albeit only the fraud on the minority was the true exception. This was the state of common law until 1982 when Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 recognised the criteria for setting out a prima facie case that was inserted in to the Civil Procedure Rules. Claims were brought under these procedural rules until 2008 when the Companies Act 2006, part 11 came in to force. However, the common law procedure does have some application still in respect of double derivative claims.


Ultimately this trend shows a climb down from total freedom of contract to the law recognising a need to mitigate against the harshness of separate legal personality and granting shareholders more power to protect the interests of the company from those who control it or cause it harm.


The tables below indicate the legal features of the case:

Prima facie case
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	No	12	26.1	26.1	26.1
	yes	34	73.9	73.9	100.0
	Total	46	100.0	100.0

Mandatory Bar
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	No	13	28.3	68.4	68.4
	Yes	6	13.0	31.6	100.0
	Total	19	41.3	100.0
Missing	System	27	58.7
Total		46	100.0

Frivolous Claims - Conduct covered
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	No	38	82.6	82.6	82.6
	Yes	8	17.4	17.4	100.0
	Total	46	100.0	100.0

Strength of Case 3 - discretion
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	weak case	17	37.0	50.0	50.0
	middle case	4	8.7	11.8	61.8
	strong case	13	28.3	38.2	100.0
	Total	34	73.9	100.0
Missing	System	12	26.1
Total		46	100.0

Permission - successful derivative claim
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	No	27	58.7	58.7	58.7
	Yes	19	41.3	41.3	100.0
	Total	46	100.0	100.0

The following tables represent practical features of the case:

Company Form
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	plc	4	8.7	8.7	8.7
	Ltd (s)	35	76.1	76.1	84.8
	other	7	15.2	15.2	100.0
	Total	46	100.0	100.0

Company Shareholding
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Minority(c)/Majority(d)	17	37.0	37.0	37.0
	Equal	14	30.4	30.4	67.4
	Majority(c)	2	4.3	4.3	71.7
	dispersed minority(c)/majority(d)	9	19.6	19.6	91.3
	shareholder(c)/director(d)	4	8.7	8.7	100.0
	Total	46	100.0	100.0

Conduct complaint - nature of complaint
		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Other	5	10.9	10.9	10.9
	Fiduciary Breach	32	69.6	69.6	80.4
	Negligence	2	4.3	4.3	84.8
	Ultra vires	3	6.5	6.5	91.3
	Multiple Claims 1-4	4	8.7	8.7	100.0
	Total	46	100.0	100.0

ODL Securities Ltd v McGrath [2013] EWHC 1865 - fiduciary duties

This case of ODL Securities Ltd v McGrath [2013] EWHC 1865 concerned "fiduciary duties" owed by a head of risk for a company. At [17] it was said that 'Although not a director of ODL, Mr McGrath was in a closely analogous position and, as such, in my judgment owed the same fiduciary duties as he would if he had been a director. These duties encompass a duty to disclose matters which it was in the interests of ODL to know, including where appropriate ... his own misconduct'.

This post expresses concerns about the number of potential issues with this statement in respect of fiduciary duties.

1) Describing Mr McGrath's position as analogous to that of a director is particularly unhelpful in respect of fiduciary duties owed by individuals. Reasoning by analogy has been described as dangerous (see Ranson v Customer Systems plc [2012] EWCA Civ 841 at [24]) since the extent or scope of one's fiduciary duties differs from case to case. To describe the head of legal risk and directors as analogous is unhelpful in determining someone's fiduciary liability.

2) The wording says that because the positions of director and head of legal risk are analogous to one another then Mr McGrath owed the same fiduciary duties as if he was a director. The issue here is that all fiduciaries owe the same duty. The duty of loyalty is universal to all fiduciaries (Bristol and West Building Society v Mothew [1998] Ch. 1, 17-18, Plus Group Ltd v Pyke [2002] EWCA Civ 370 at [80]). Whether the fiduciary is a solicitor, trustee, parent, director, partner they all owe the duty of loyalty which is the defining feature of a fiduciary relationship. The premise needs to be whether Mr McGrath owed the duty of loyalty and not simply that he owed the duty because his position was similar to that of a director. A director as a fiduciary will owe the same fiduciary duties as a head of legal risk because they are both fiduciaries.

3) The duty of loyalty is designed to regulate the problem of opportunism where one has access to another's property and affairs for the exclusive benefit of that person. It prevents the fiduciary from obtaining an unauthorised benefit from their position that would conflict with the interests of the principal. Best interests are wider than this. It is possible to not act for the best interests of the principal without being personally conflicted. As Millet LJ explained in Mothew at [18] in respect of the duty to act with reasonable skill and care that 'mere incompetence is not enough [to breach your fiduciary duty]. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty'. Thus, there is only a breach if that incompetence is based on a conflict of interest. The same applies to the duty to act in the company's best interests. It would have been accurate of Flaux J to say Mr McGrath owed similar duties to that of a director, but not fiduciary duties. As Millet LJ said in Mothew at [16] 'unless the expression [fiduciary] is so limited it is lacking in practical utility'.

As another note this confusion with respect of fiduciary duties is also noted earlier at paragraph [15] where Flaux J describes a duty to disclose as part of a duty to avoid a conflict.

4) Equally the duty is proscriptive in that it bans conflicts of interest. It is not prescriptive in requiring positive action on behalf of the fiduciary. Therefore saying there is a fiduciary duty to disclose misconduct is mudding the waters of fiduciary jurisdiction.

5) The normal remedy for a breach of fiduciary duty is for the fiduciary to disgorge any personal benefit derived from the conflict and have it held on trust for the beneficiary who has a proprietary right to the benefit obtained. Simply failing to disclose misconduct, would potentially breach the duty to act in the best interests of the company if it was its best interests to know as was the case in Item Software v Fassihi [2004] EWCA Civ 1244 which was cited at paragraph [17] in this case. But the appropriate remedy was not to disgorge the benefit because there is no benefit to disgorge. It is possible a claim may be brought for equitable compensation (and indeed was the case here) if causation can be established between failure to disclose misconduct and harm done to the company but this is not like strict liability for breach of fiduciary duty which would simply require the disgorgement of the benefit once it is established that there was a conflict.

The facts concerned Mr McGrath who made a series of commercial loans who knew, at all materials times, was not the business of ODL. The loans were made by Mr McGrath of ODL to a company, or connected to a company, called A1 Holdings Ltd, which Mr Clements was personally interested in and a substantial creditor and shareholder; but Mr Clements was also the person who operated ODL's separate corporate finance business. When A1 Holdings Ltd went in to administration, Mr Clements was owed in excess of £3m. ODL sought equitable compensation/damages for the unauthorised loans made to A1 Holdings.

Some of the loans made were made without security, one was made to a company ran by a man Mr McGrath had only just met, and one was made with a promise of a personal payment of $1m to Mr McGrath from A1 Holdings. It is difficult to see how the failure to disclose his misconduct in authorising such loans that he was not authorised to make would be a breach of fiduciary duty. It is clearly a breach of the company's best interests to not disclose because the loans on any objective assessment were unlikely to be repaid, exposed the company to more risk when it was its business to be exposed to less risk, and it was not the nature of the company to make such loans. But without a conflict of interest it is not a breach of fiduciary duty, and even with the conflict in the third loan as to the personal benefit offered to Mr McGrath it is not the failure to disclose that gives rise to the breach of fiduciary duty but the benefit itself.

The judgment makes a series of references to dishonesty and fraud to demonstrate that Mr McGrath knew the loans were not in the interests of the company and had breached his fiduciary duty. This does nothing to add to his fiduciary liability. Liability is strict. Once there is a conflict, liability is established. It does not have to be established that the fiduciary acted fraudulently, dishonestly, acted in bad faith or did not try their hardest, for example. The fact he was dishonest and/or fraudulent in hiding the unauthorised loans did not matter. The loan where he was offered a personal benefit evidenced a conflict and he would have been in breach whether he honestly believed to be acting for the interests of the company or not. This is not to say the dishonesty and fraud does not demonstrate his breach of duty of care or best interests, but as stated, these are not fiduciary duties.

Therefore it seems in respect of breaches of fiduciary duty, Mr McGrath would have only done so in respect of those loans in which he was offered a personal benefit since he acted opportunistically for his own benefit creating the risk that he would not be loyal to the interests of ODL. The other loans, whilst breaches of his duty of care and duty to act in the best interests of the company, were not fiduciary breaches.

Forthcoming publication

In amongst life as a 1st year academic I have managed to find a slither of time for a case comment on the Court of Appeal decision in Chandler v Cape plc [2012] EWCA Civ 525.

It is due out in January and will be published by the International Company and Commercial Law Review. The thurst of the article (spoiler alert) is to highlight that whilst the decision may be interesting and hold practical significance, it does not alter the legal landscape as it was based on a pre-existing concept of assumption of responsibility.

Much ado about nothing? Is Chandler v Cape significant?

A recent Court of Appeal in Chandler v Cape plc [2012] EWCA Civ 525 decision has found that a parent company owed a duty of care to its subsidiary employees.

This is the first time an employee has successfully established liability to him from the parent company. Some people are claiming this is an attack on the separate legal personality principles, fundamental to company law. The case of Adams v Cape [1990] Ch 433 affirmed that a group of companies was not one legal entity. Each individual company in a group has its own legal personality. Whilst at first glance one may think this is open to abuse by having a rogue trader set up a number of companies to avoid liability this very rarely happens in practice. On the contrary allowing a group company to have different legal personality is beneficial for reasons such as diversification in business or due to geographical locations. Arcadia may be a good example of this. Furthermore, there are market forces that, at some level, prevent the abuse by parent companies of their subsidiaries, especially if they have similar creditors or suppliers.

Returning to the Chandler case the court found a duty of care was owed by the parent company to the employee of the subsidiary. The court of first instance had applied the test for how a duty of care is established, which is highlighted from the case of Caparo Industries v Dickman [1990] 2 AC 605 that a duty of care is owed if there is:
1) Reasonable to foresee harm
2) Proximity
3) Whether it is fair, just and reasonable for a duty of care to be owed

So, it may not come as quite a surprise that a duty of care was owed by the parent company to the employees of the subsidiary when one looks at this test. If the facts of the case demonstrate this three criteria then stringent rules of separate legal personality should not prevent a duty of care being owed. That would effectively, and excuse my limited knowledge of tort, go against basic principles that developed from Donoghue v Stevenson [1932] UKHL 100. To the effect it would basically imply if the parent company could not be liable then a manufacutrer of goods could not be liable to an eventual purchaser due to an intervening supplier of the goods after production.

And one must argue that the facts of the case do support a duty of care being owed. Here the parent company had superior knowledge of the health and safety of the particular industry; the parent company knew, or ought to have known that the subsidiaries system of work was unsafe; The parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using the superior knowledge for the employees' protection and it was not necessary to show the parent company often interfered with the health and safety practices of the subsidiary. The court will look at the relationship between the companies more widely.

So is this piercing the corporate veil and ignoring the principle of separate legal personality for different companies in a group. The court was emphatic in rejecting such a notion. They note the question was simply whether the parent company owed a duty of care. An article written by Eccles suggest that this does pierce the corporate veil. But his arguments as to why seem to be merely restating the facts and recognised law in relation to duty of care, rather than stating why the veil has been pierced here.

He notes this pierces the corporate veil...'but only on the basis of an existing concept of assumption of responsibility - Caparo Industries v Dickman'. As you can see he merely restates that a duty of care was owed under the existing principles. A person who takes certain responsibility will owe a duty of care if the facts satisfy the criteria above.

I would agree with Eccles though that in practice companies with subsidiaries may want to review any existing insurance policies if this has been overlooked.

For the corporate veil to be pierced one needs to ask if the two separate companies are being treated as one for the purposes of liability. The answer here is no. The parent took on a duty of care through its (in)actions. Thus, the court recognised the parent company's separate legal personality and was not piercing the corporate veil to say the parent and the subsidiary were one. Perhaps further work in light of quite a few new cases, see here here and here, on this topic needs to seek a more accurate definition or categories of when the corporate veil will be pierced.