The BHS scandal shows that we need workers on boards

Corporations are being run entirely in the interests of executives and shareholders, with little concern for anyone else

BHS

 

The demise of retailer BHS (previously known as British Home Stores) draws attention to the need to change the way major corporations are governed.

Currently, corporations are run as private fiefdoms for the benefit of directors and shareholders. The wealth is generated by the collective energies of all stakeholders, but is being appropriated by a few executives and shareholders to the detriment of employees, pension scheme members, suppliers, customers and other stakeholders.

BHS was bought by Sir Philip Green and his family for £200 million and some reports suggest that around £580 million has been taken out in dividends, rental payments and interest on loans.

BHS was surrounded by highly paid accountants, auditors, lawyers, bankers and non-executive directors. None ever objected to the extraction of cash or drew public attention to the perilous state of BHS’s finances even though it and its parent company had been technically insolvent for years.

Two parliamentary committees are currently investigating the demise of BHS. A key factor is likely to be the large extraction of cash by BHS’s shareholders who were also its directors.

The jobs of 11,000 workers are at risk. The employee pension scheme representing 20,000 past and present employees is in deficit, possibly for more than £500 million. Scheme members are facing cuts in pension entitlement. There will also be knock-on effects on people working in the supply chain as many creditors will not be able to secure payment for the goods and services supplied to BHS.

The demise of BHS demonstrates that companies are not private entities. They affect the lives of many people. The BHS debacle once again shows that companies that produce short term gains for present shareholders do not necessarily produce wealth for employees, other stakeholders or society.

The obsession with enriching shareholders persuades management to pursue cavalier strategies. They do not bear the cost of their excesses because they are shielded by limited liability.

Companies frequently claim that employees are their biggest assets, but deny them any say in the way companies are governed. Employees have a vital interest in the long-term success of the company but have no right to elect directors or shape corporate policies.

Section 172 of the UK Companies Act 2006 requires company directors to promote the success of the company by having regard to the interest of employees, suppliers, customers, community and the environment, but all this has to be for the ultimate benefit of shareholders.  This does not empower stakeholders.

UK corporate legislation sees directors as agents of shareholders rather than as trustees for stakeholders. As trustees, their responsibility should be to ensure that the wealth of the company is allocated fairly to all stakeholders and not just appropriated by a few executives and shareholders.

Company directors can be prosecuted for making false statements to shareholders, but there is no equivalent duty to be truthful to employees and other stakeholders.

A major lesson from the BHS scandal is the need to change the way large companies are governed. Some countries already have employees on company boards. Since the Second World War major German companies have been obliged to have a system of two-tier boards. The Executive Board manages the business. The second-tier known as the Supervisory Board consists of other stakeholders, such as employees, and is responsible for oversight of the executive board.

Companies with more than 500 or 2000 employees are required to have employees on their Supervisory Boards on a scale starting for one-third to 50 per cent. The two boards co-operate for the long-term success of the company.

The Supervisory Board hires and dismisses the executive board. It negotiates executive remuneration contracts, approves long-term investment plans and business strategy. It approves transactions that can fundamentally change the financial dynamics of a company, such as raising new finance, acquisition of assets, dividends, etc. It checks that internal checks and balances work well to safeguard the long-term well-being of the company.

Employee representation on company boards is not a panacea and does not guarantee freedom from abuses, but Germany has managed to achieve higher economic growth than the UK’s.

More importantly, if companies like BHS had Supervisory Boards and employees and pension scheme members were represented on it, they would surely have asked questions about the consequences of extracting hundreds of millions of pounds from the company.

It would have considered the impact of the cash extraction on BHS’s ability to invest, compete or fund the deficit in pension schemes. Such governance structures would have checked the selfish games played by directors.

Of course, there would be resistance to reforms that dilute the power of elites to hijack companies. Recent history shows that the national minimum wage, health and safety, gender equality and other reforms had to be imposed in the teeth of opposition.

All this has promoted confidence in businesses. The same will be necessary again because we can’t afford more BHS’s.

Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability

12 Responses to “The BHS scandal shows that we need workers on boards”

  1. jay ginn

    Certainly Prem makes a good case for employee representation on boards, citing the practice in Germany.
    But is ‘representation’ enough? I suggest elected employees should be a majority on any decision-making bodies. Employee share ownership is one model (John Lewis, Co-op retail, or further afield the Mondragon employee-owned and -managed enterprise in northern Spain.

  2. Prem Sikka

    Thanks for the comment. I would prefer elected stakeholders to sit on the supervisory boards. John Lewis and Co-op show that corporations are not the only game in town. Governments should be encouraging alternative forms of business vehicles. The danger is that post-BHS debate can degenerate into ‘it was few rotten apples’ (like it did after the banking crash) and we need to pay attention to the systemic problems and push for structural reforms.

  3. Sue

    The problem with the elected stakeholders sitting on the supervisory board is that they might not have the right credentials. This is specifically reflected in the Coop Bank failure in which Sir Christopher Kelly reported that one of the underlying reasons of the failure of Coop Bank was the board members did not have people with the right banking skills and expertise as to how a Coop bank should be run and managed. They basically have priest, nurses, teachers among others sitting on their supervisory boards. Hence, if you have wide stakeholders representational on the board without the right expertise (which is most likely to happen), how would they be able to question, challenge and overseeing the executives team, in the event if they don’t know what they don’t know.

  4. Wanda Lozinska

    The late Michael Meacher MP often made this very same point. Here’s an example:
    “….. the key principle that worker involvement mechanisms including board representation are subject to negotiation between workers and the employer. This is also the keystone to a series of wider employee rights including to information, consultation and c-determination. The advantages, as they have been found in other EU economies, in terms of greater commitment to the firm, higher productivity, lower turnover and absenteeism rates, and increased innovation speak for themselves. Time for Labour to start a debate on this. It is sorely needed and would be very popular.”

    http://www.michaelmeacher.info/weblog/2014/08/its-time-for-labour-to-speak-out-on-corporate-governance/

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  6. Filipe Morais

    Dear Prem,

    Many thanks for your insights and deep penetrating questions to be asked to PWC and KPMG at the parlimentary committee. Its shockingly obvious what has happened at BHS
    I am a fan of Germany stakeholder governance model, it is the only one that can really secure some hope of long-term sustainable development. Yet, what we observe is countries which typically were stakehoder-oriented are shifting to the Anglo-American way. See the recent example of the Netherlands . On the other hand, implementing employee-elected directors in the UK, would face tremendous resistance, and I also recognise that the acummulated social capital between employees and management in the UK, is far less that that of Germany. What you are proposing isnt a change of structure, is a change of culture and that is a difficult, difficult task, unless catastrophy strikes (and even then not guaranteed, i.e. 2008 Banking crisis).

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  8. Prem Sikka

    Thank you Wanda. It was my pleasure and honour to know Michael Meacher. I worked with him on some matters and also contributed to be book before his untimely death.

  9. Prem Sikka

    Than you Sue. Nothing is perfect but we need to find ways to checking and disrupting the selfish games that enrich a few but bring misery to thousands. I am certain that together we can develop good policies.

  10. Prem Sikka

    Thank you Filipe. The choices may be difficult and controversial but not doing anything is even more costly. How many BHS’s can we afford?

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