While corporate barons refuse to democratise their companies, the government is failing to act

Only 5% of firms who've decided to comply with a new corporate governance code say they'll appoint a director from the workforce.

How democratic is the UK? The routine is that every 4-5 years we put a cross on a ballot paper. But despite some advances in employment rights and social welfare, the structure of power and privilege remains virtually untouched.

The old boys/gals networks are alive and kicking, opening doors to top jobs and company boardrooms. This week, a report from the Social Mobility Commission concluded that inequality and class privilege is “now entrenched from birth to work.” Knowing the right people can get you seats on company boards, non-executive directorships and places on audit committees and remuneration committees.

Even the modest form of liberal democracy is yet to cross the factory gate or office door. Employees are routinely traded in the mergers and takeover bazaars, but have no say. Episodes such as BHS and Carillion show that directors are free to dump pension scheme deficits and employees have little say in that. In April 2018 alone, some 439,000 individuals were illegally paid below the statutory Minimum/Living Wage. But they can’t get their plight heard in company boardrooms.

Elsewhere in Europe, corporations are increasingly being democratised. Today, the UK, along with Belgium, Bulgaria, Cyprus, Estonia, Italy, Latvia, Lithuania, Malta and Romania, is among a minority of countries without a statutory requirement to have any form of employee representatives on company boards.

For the majority who guarantee some worker representation, this has improved the long-term wellbeing of companies, and all stakeholders have benefited in the form of economic stability, higher investment in productive assets and research and development, productivity, economic growth and wages.

Token gestures

In the UK, during her 2016 campaign to secure the leadership the Conservative Party and become Prime Minister Theresa May said “we’re going to have not just consumers represented on company boards, but employees as well.” Under pressure from the corporate lobby, she abandoned this promise, and a shareholder-centric model of corporate governance remains entrenched in the UK even though shareholders have a short-term interest in companies.

As a token gesture, the government asked the Financial Reporting Council to put some workforce engagement suggestions in its revised Corporate Governance Code. The Code is primarily aimed at listed companies and would not have applied to BHS many other large firms. Companies are expected to comply or explain departure from the Code, but it is not part of any statute and does not give stakeholders any legally enforceable rights.

The Code recommended that from 1st January 2019 there should be engagement with the workforce – with companies voluntarily using one or a combination of the following methods: a director appointed from the workforce; a formal workforce advisory panel; or (the weakest form) appointing a non-executive director.

Has the collapse of BHS, Carillion Bernard Matthews, HMV, Maplin, Patisserie Valerie, Debenhams, and London Capital and Finance encouraged any reflections in boardrooms? Are the corporate barons really keen to democratise their fiefdoms?

Stymieing progress

A survey of FTSE100 companies by the Local Authority Pension Fund Forum (LAPFF) sheds some light on corporate governance practices.

Two-thirds (66%) of all respondents said they had decided how to comply with the Code. Of the rest, almost 18% planned to simply explain their current set-up rather than comply. The remainder were undecided on how or whether to comply with the Code

Almost three quarters (73%) of companies that have decided to comply with the Code said they would appoint a designated non-executive director. 27% opted for a workforce advisory panel. And just 5% of the respondents said they would appoint a director from the workforce.

It is worth bearing in mind that non-execs are often directors’ friends and are parachuted into companies. They are part-time, and hold multiple appointments, and may spend one-two days a month on corporate matters. They are not elected by employees and do not receive any mandate from employees.

The result is disappointing but not unexpected. The puzzling thing is that many of the companies in the survey operate in European countries where employee representation on unitary or two-tier company boards is the norm. The thresholds are shaped by local histories. For example, Denmark has a size threshold of 35 workers or larger for firms to require employee representation on company boards. It is 100 for the Netherlands, 150 for Finland and 500 for Germany.

Who will act?

The UK’s corporate barons are not keen to democratise corporations and the Conservative government has shown no stomach for challenging them. So the baton passes to the Labour Party.

At the party’s September 2018 conference, Jeremy Corbyn committed the next Labour administration to put workers on the boards of companies with more than 250 employees. The employees would have least one third of places at the boardroom table, with a minimum of two.

This is the first small step in democratising corporations and would no doubt be resisted by corporate barons just as they resisted the minimum wage, gender equality, health and safety and many other laws. But wiser souls know that democracy is good for society and businesses.

Prem Sikka is a Professor of Accounting at University of Sheffield, and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor for Left Foot Forward and tweets here.

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4 Responses to “While corporate barons refuse to democratise their companies, the government is failing to act”

  1. Tom Sacold

    When workers are put on the board they become part of the bosses culture and become the bosses’ man.

    We need proper public ownership and control over large companies not this token gesture that will always fail.

  2. Patrick Newman

    So Mr Sacold, it’s total nationalisation?

  3. richardfalvey555101905

    So Mr Newman, what makes you think you live in a democracy when the third + of your life you spend at work / travelling to work / working / thinking about work is at the autocratic behest of your managers. (Admittedly there’s the possibility that you’re self employed or a partner in a business, or a CEO – but this is not the case for the vast majority of people) If you’d paid attention you’d have seen that Mr Sacold said public control and ownership over LARGE companies, by sefinition that excludes SMEs which according to the Federation of Small Business “Small businesses accounted for 99.3% of all private sector businesses at the start of 2018 and 99.9% were small or medium-sized (SMEs). Total employment in SMEs was 16.3 million; 60% of all private sector employment in the UK”. So the answer to your knee-jerk response is a NO, not total nationalisation. Perhaps those businesses that are not big enough to require nationalisation can all become cooperatives?

  4. Patrick Newman

    You accuse me of a knee jerk reaction when all I asked was a question about a vague point of view!

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