Company Boards

Andrew Smith Excerpts

Tuesday 26th November 2013 Westminster Hall

[Jim Sheridan (Paisley and Renfrewshire North) (Lab)]

Thank you, Mr Hollobone, for calling me to speak. It is a genuine pleasure to serve under your chairmanship.

In recent months, we have lived through difficult times in relations between employees and management. Grangemouth was a black mark on industrial relations in this country, and showed the work force there being exploited and totally taken advantage of by aggressive management. In the past year, my Labour colleagues and I have also been fighting for the rights of thousands of workers who have been blacklisted and blocked from working by immoral construction companies. The Government’s moves to bring in a Bill that will make being a member of a trade union all the more difficult will do nothing to improve relations. As chair of the Unite the union’s parliamentary group, and with plenty of trade union experience before coming into this place, I can truly say that I am saddened by the low that we have come to and the distrust and anger that we see on all sides.

I have come to Westminster Hall today to propose not a new idea but what I think would be a productive and collaborative way to allow constructive dialogue between managers, workers and shareholders. We need to find a way to work together for the sake of the British economy and the livelihoods of our hard-working constituents.

Our economy is too shareholder-focused. The pursuit of quick profit leads to short-term thinking and a lack of investment in our companies, and our focus on shareholders means that cultural barriers may further hinder investment. In 2010, 41.2% of investors in British companies came from outside the UK, and it must be true that a shareholder in a company who has investments all over the world takes less of a direct interest in that company than an employee of that company would. It leads to examples of bankers hedging their bets and putting people’s lives and jobs on the line. It also leads to a lack of training for staff and a lack investment in infrastructure, meaning that companies will last for the next few years but not for the next 40 years.

Our company structures are not good for the economy. They lead to a lack of stability and to unequal distribution of gains from growth. We know that there is a public outcry at this system in the economy, and not just from the left. It seems to me that giving workers more of a say on our boards could be a key way of improving our broken economy. People want the next boom to benefit everybody, and a responsible Government will ensure that that happens. The Leader of the Opposition has rightly pointed towards “responsible capitalism”, and I hope that my proposal will form part of that under the next Labour Government, hopefully in 2015.

Of course, having worker representatives in a position on the board is good for employees, including those who feel downtrodden or that they have no job security, but who could contribute to the running of a company much more productively than people who do not know the shop floor. In a survey of workers’ representatives in other EU countries, one Swedish representative said:

“We think of the employees who other board members sometimes forget.”

The issue is a moral one about what we want a 21st-century UK business to look like. Do we want to return to Dickensian scenes in which profit overrides everything and workers have no rights, no pride and no say in the job in which they spend so much of their time? Or do we want management to remember that those working for them need to be considered when they make changes to the company?

Whether employees are simply forgotten or neglected when decision are taken is irrelevant. What we need is someone championing their needs, in the same way that those of shareholders and of management are put forward. It is important to remember that many employees, unlike shareholders, cannot just walk away. They have trained for that job and so cannot diversify themselves as easily as shareholders can. They are key stakeholders tied to the company, and their issues need to be heard.

Having workers’ representatives on boards is good for business. The use of labour representation has been found to increase the value of firms. Employees have a detailed knowledge of the shop floor and of operations, so they become an important source of information for those making long-term decisions. In other countries, the proposal has been found to make a company more efficient. In a study of representatives, they remarked that their key knowledge of everyday business and employee matters made them specialists on the board, in the same way that other board members were specialists in, for example, accountancy or strategy.

The proposal would be good for business also because it would improve relations between the work force and management. It is telling that even Mr Ratcliffe of Ineos compared Germany with the UK and commended the good working relationship between unions and companies in Germany; this is the same Mr Ratcliffe who partly caused the problems at Grangemouth. I think a key part of that is the fact that workers in Germany sit on boards and can negotiate on issues before they get too far down the line.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate my hon. Friend on putting this important issue on the agenda; he is making a powerful case. Does he agree that, although worker representation on boards cannot and will not be a substitute for collective bargaining, it ensures that such bargaining takes place in an atmosphere that is more like a partnership, which is constructive? I have seen the benefit of that in my constituency at Cowley, where I can contrast the industrial relations in BMW with how they were in Rover and British Leyland previously.

[Jim Sheridan]

My right hon. Friend makes an excellent point. I can only use my own experience before I came to the House, when I worked for Thales, which was a progressive company. It downsized during the defence cuts, cutting thousands of jobs, but it did so by talking to the trade unions and workers’ representatives. In Scotland and Portsmouth, BAE Systems is talking to its employee representatives in a progressive way and treating people like grown-ups. We can contrast that with what happened at Grangemouth.

In times of poor performance, employees are likely to be more aware of the troubles of their company and may offer concessions. Equally, they will expect returns when the company is doing well. Importantly, having a representative on the board offers an opportunity for early consultation. A recent survey found that, in such cases, both sides tended to be more realistic about the issues at hand.

Financially, the proposal works well, with fewer days lost to strike action. Germany lost 3.7 days to strikes for every 1,000 employees in 2008, whereas the UK lost 28 days in the same year. That is not a one-off: in 2007, Germany lost 8.1 days, while the UK lost 38 days. No worker likes to go on strike; it is always the very last option and a huge deal for all involved. The contrast shows how much more effectively Germans manage differences between employees and management. They come to more compromised agreements that suit everyone early on, and negotiations with the unions much less frequently result in strike action. I cannot see how companies, or indeed the Government, could disagree with a way to reduce days lost to strike action in the UK.

Directors like the system, with more than 60% of directors and 70% of chairpersons surveyed in Sweden finding the experience “very positive” or “rather positive”. Martin Gilbert, the outgoing chairman of FirstGroup, one of the few companies that use the system in the UK, said:

“The presence of employee directors on the FirstGroup board is invaluable. The few drawbacks are greatly outweighed by the benefits and having this two-way channel of communication has positively impacted on the running of FirstGroup.”

The proposal is popular, with 76% of UK employees in favour, according to a Survation poll. People are beginning to recognise that we get better results if a company board is representative of its work force. I think we are all in agreement that we need more women on boards, and we all see that it would be good for employees and the work force. The difference between the situations of women and employees in general, however, is that employees will never be at board level unless we change the rules.

I propose that we follow our European colleagues and make it mandatory to have employee representatives on boards. The Minister might say that we should not model ourselves on such countries, because the UK is different. However, the responsibilities of German supervisory boards are similar to those of British and American boards. We can therefore look at the German success story and follow suit. We even have a UK FTSE 100 company, FirstGroup, to model the idea on.

The proposal is not in direct contrast to what the Government have proposed. They are keen to encourage John Lewis-style employee-owned companies through tax breaks. There is appetite on both sides of the House to give employees more of a stake in their company—their livelihood. That is especially true with regard to executive pay, with the Secretary of State for Business, Innovation and Skills proposing to make boards and remuneration committees more diverse, following a cross-party Treasury Committee report in 2009 calling for more employee representation on those committees. Extending that to boards as a whole, which would make decisions more directly applicable to employees, does not seem to be much of a stretch.

I am sure Members have heard arguments on the issue from friends in the corporate world. There is a lot of resistance to the idea from UK directors. They say that it might move the objective of a board away from maximising shareholder value towards maximising the payroll. I question whether that is really a bad thing. In these years following a financial crisis, we should be looking to make companies less short-term focused and more rounded. We want UK companies that stand the test of time and that are good for communities. A board looking to do that would be focused not only on dividends. Also, we are talking here about some employee representatives, not 50:50 representation of directors and employees. The proposal would just give employees a voice and give the board a fresh perspective.

Members might also talk about the additional burden that the proposal would bring. They might say that it would make boards bigger and therefore less efficient, with members preparing less before meetings. There is indeed evidence that smaller boards are more effective, but evidence from Swedish employee representatives shows that corporate leaders and representatives are capable of co-operating in a way that is of benefit to all. Any inefficiency would be outweighed by the benefits of greater understanding of the company’s operations and more co-ordinated decision making.

Members might have been pressed about the risk of confidential information being leaked. However, we are first looking to improve relations between employees and the board, so I am confident that employees would respect the additional responsibility. Evidence from other countries shows that they are rarely tempted to whistleblow; if they are tempted to do so, does it not suggest that the company is up to no good?

British businesses are wary of employee representation, but that is because we do not have a culture of it, and because it would be likely to reduce ridiculously high executive salaries. For example, the boss of Volkswagen in Germany, Martin Winterkorn, saw his bonus for 2012 cut by 20%. Most directors are comfortable with high pay, because they are detached from reality. What they need is people on their board who can bring them back down to earth. There has rightly been scandal after scandal about bonuses and million-pound salaries. The Labour party supports having employees on remuneration committees, but I think it would be much more effective if we put them on boards, right at the top.

I understand the difficulties of forcing the proposal on to companies, but I do not understand why we cannot encourage those with whom we do business to adopt the approach. We could ensure that, in a tendering process for public services, more weight was given to companies that had adopted this collaborative approach to their board system. For companies regulated by Ofgem, Ofcom or Ofwat, we could ensure that part of the regulation was a better deal for employees through employee representatives. I am convinced that there would be wide public support for a measure that ensured that profits were spent on the right things, rather than on shareholder dividends or executive salaries and bonuses.

We can change the culture of the corporate world little by little, and employee representatives could be a first step. It would be a good deal for business, a good deal for consumers and, most of all, a fair deal for employees.

[The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Jo Swinson)]

I start by congratulating the hon. Member for Paisley and Renfrewshire North (Jim Sheridan) on securing this debate, which is a helpful opportunity to discuss employee representation on the boards of UK companies. There has been a recent report by the Trades Union Congress on the topic.

I agree with much, although perhaps not all, of what the hon. Gentleman says. I may have to disappoint him on some issues, but I agree with much of his sentiment and many of his points, particularly on the positive role that the trade unions can play in industrial relations. It is sometimes far too easy to demonise trade unions without remembering that we have historically low levels of industrial action. The hon. Gentleman is right that we always want to do what we can to reduce industrial action even further, but the vast majority of trade unions work constructively and positively with employers in the workplace. Thankfully, examples such as Grangemouth, where industrial relations are in a much less positive sphere, are the exception rather than the rule.

I also agree with what the hon. Gentleman said about the downsides of pursuing short-term profit above all else, which the Government also recognise. My right hon. Friend the Business Secretary commissioned the Kay review to consider the matter, because we agree that long-termism is in the interests of the UK economy and, indeed, individual companies, but sometimes the models that we have in place reward and incentivise the pursuit of short-term goals, rather than long-term goals.

I take seriously the concerns of the hon. Member for Paisley and Renfrewshire North on the abhorrent practice of blacklisting, evidence of which the Government are very open to receiving. Of course, the Select Committee on Scottish Affairs recently held an inquiry into that practice.

The benefits of employee engagement within the workplace are significant and well proven, and we definitely want to encourage such engagement. I would make the case that the only way to do that is through worker representation on company boards. I think it would be desirable if more workers were represented on boards, and there is nothing in law stopping companies from having such representation.

The hon. Gentleman referred to the FTSE 100 company First Group, which of course has such representation on its board. He read out the company’s powerful testimonial on the consequent benefits to its operations, and many companies may want to consider such representation by looking at the experience of First Group. Ultimately, it is better if the decision is taken by companies, rather than being mandated across all firms, not least because choosing to do so probably means there is much more chance that a company will actually engage with the real issues and view the engagement positively than if it was forced to do so through Government intervention.

[Mr Andrew Smith]

Is there not an argument that the companies that are most reluctant might be the ones that need worker representation and could benefit from it the most?