Businesses: Rights and Responsibilities

Lord Monks Excerpts

Thursday 8th December 2016 Lords Chamber

[Lord Monks (Lab)]

My Lords, I am grateful to the noble Lord, Lord Hodgson of Astley Abbotts, for so thoughtfully introducing and launching this very timely debate on corporate governance. I share his enthusiasm for this subject; if I do not agree with everything that he has said, it is not for the fact that we do not have a lot in common in many of the analyses that he has made.

In my view, the issue of corporate governance is at the heart of many of the weaknesses of the British economy, which continue to be a drag anchor on our performance in some important areas. Indeed, I would go as far as suggesting that, rather like some banks, capitalism itself—if it does not pay heed to some of the criticisms—is not too big to fail when it is set against the challenges that it faces. Our current economic model has features that pose a threat to our prosperity as a nation, whether we are in or out of the EU in the longer run.

We all know, at least theoretically, what we need to do. We need to concentrate much more on long-termism—long-term investments and boosting productivity through investment in the best possible equipment and best possible skills. We also want to see fair wages applied throughout the economy. But instead, the real focus of much of business is on short-term returns to shareholders—the noble Lord, Lord Hodgson, referred to that—and linking those returns to the remuneration packages of senior executives, which I understand takes an inordinate amount of time in some boardrooms to try to resolve. The results are a historically low rate of investment, with the UK among the OECD’s less impressive performers, a level of productivity that is embarrassingly poor compared to similar nations, and real wages which, for the many, have barely moved since the economic recession of 2008. At the same time, executive pay has rocketed and the gap between the top and bottom earners has widened, showing no sign of significant narrowing.

I welcome the fact that the Prime Minister recognised this when she launched her leadership campaign for the Conservative Party and said:

“I want to see changes in the way that big business is governed”.

She went on to criticise the make-up of boards, saying,

“we’re going to have not just consumers represented on company boards, but employees as well”.

I was sorry to see her subsequent retreat once the CBI had said boo to these ideas. Instead we have a rather weedy Green Paper on corporate governance, which complacently lauds the British model of corporate governance, claiming rather vaingloriously that it is “world leading”, giving us an “international competitive advantage”. In my view—and I think in the Prime Minister’s view when she gave that speech to launch her campaign—this particular phraseology in the Green Paper is wrong; the original remarks by the Prime Minister were right.

The Green Paper floats ways to develop the connection between the boardroom and the workforce, including the establishment of advisory panels and the appointment of designated non-executive directors to take responsibility for articulating stakeholder perspectives. This is rather paternalistic. It is not really good enough, although it will no doubt be too much for many employer interest groups, which predictably will already be drawing up their lobbying proposals to weaken still further the Government’s already waning interest in this important subject.

We are in danger of missing a great opportunity to reform directors’ duties, so that directors are required to promote the long-term success of their company. We are perhaps missing, too, the opportunity to go further and to recognise the interests of other stakeholders—not just the shareholders—in corporate governance and, in particular, the interests of the workforce, which often has the most at stake in any problems that a company runs into. The workforce is of course often lauded as a company’s greatest asset, but too often it is sacrificed on the altar of boosting short-term returns. It is also too often undertrained and underpaid.

Part of the answer to these problems—though not all the answer—would be elected worker representatives on the board. They would be a pressure point for long-term success and organic growth and would help to counter the emphasis on short-term financial engineering. In much of continental Europe, as many of your Lordships will recognise, worker representation is an accepted and valued part of how large companies operate, including, currently, in the continent’s most successful economies—Germany, Austria, the Netherlands, Sweden and Denmark. In those countries, worker representation on boards is a widely supported feature of company life. Even among company chairmen there is a high degree of support. I remember asking a Dutch CEO who had been a manager in Britain before taking a top job in the Netherlands what difference this worker representation made. He said that it probably made a marginal difference to some of the decisions his company took, but that it made a big difference to the way in which they were taken and the care that was taken to involve the workforce in the steps that were taken. When I was general secretary of the European Trade Union Confederation, I encountered similar experiences in Germany, where worker-directors take hard decisions without breaching any confidences. They make sure that these decisions are taken after considering all the alternatives. They are careful in what they do and treat people as human beings.

The evidence is clear that countries with high standards of worker participation—rights on boards, workplace representation and collective bargaining—score more highly across a range of measures such as R&D expenditure, the employment rates, educational and training levels and participation. They also have higher scores on economic success and a more equitable economic success, with narrower gaps between the top and the bottom than we have at present.

This correlation between success and worker involvement and participation is not just a coincidence but a direct result. I ask the business community to reflect upon these lessons from abroad. It is not just lessons from abroad; I noted that there has been some support expressed recently in this country for worker representation on boards. Legal & General and Aberdeen Asset Management both supported the kind of things that came from the union side of the debate on the issue of the Green Paper. FirstGroup, an important transport company, has a worker-director. I wish that others would put their short-term interest to one side and come to the same conclusion.

I hope that the Government will become less complacent as they consider the responses to the Green Paper and will return to the Prime Minister’s original ambition, that they will summon up some courage to face down the employer lobbyists who will be extremely busy trying to make sure that none of this happens, and that they summon up the energy to create a framework of corporate governance that works for everyone, not just the privileged few.