Company Boards

Jim Sheridan 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.

--- Later in debate ---

[Jo Swinson]

That argument is always made on a range of issues, but we are trying to change the culture. The hon. Member for Paisley and Renfrewshire North rightly referred to that towards the end of his remarks, and it could be done in a variety of ways. I argue that sometimes mandation and regulation are not necessarily as effective as other methods of encouraging businesses to recognise the benefits of particular forms of behaviour. Whether on employee engagement or diversity, we need to consider what is the right tool to get the result that we want.

Further, there are a number of reasons why mandating that companies must have worker representatives on their boards would not be desirable. Part of that is because of the way in which our board system is structured. Our board system is different from other European countries that have been mentioned. We have a unitary board system, which means that anyone sitting on a board or a board committee is a director with the same responsibilities and duties as other directors, and is equally accountable to shareholders for decisions.

There is no legal distinction between different types of director, whether or not they are representing employees. All directors have a legal duty to have regard to the interests of employees in promoting the success of the company, and we need to be slightly wary of the danger that, if we force an employee representative on to boards, it could have the perverse, unintended consequence that the other directors on a board might take less seriously their existing duty to have regard to the interests of employees. We want all directors on boards to be thinking about that, rather than having it siloed into one individual position.

[Jim Sheridan]

Does the Minister agree with the comments of the now infamous Mr Ratcliffe that the events at Grangemouth would never have happened in Germany simply because there would be workers on the board who could have flagged up the problems earlier?

[Jo Swinson]

I am not sure whether I will take up the tempting offer to agree with Mr Ratcliffe, but better discussion and dialogue between workers and management is always the best way to avoid disputes. The vast majority of cases, thankfully, do not get to the stage that Grangemouth did—there were horrendous consequences, the worst of which were thankfully averted. None the less, it was difficult even to get to where we did, which is a far from ideal situation.

We must encourage such dialogue. Obviously, one way to do that could be through worker representation on company boards, but I disagree that that is the only way in which that dialogue could happen. Indeed, I suggest that employers can do a great amount, even without such representation, to ensure that they properly engage with their work force, address issues as they arise and have mechanisms in place to pre-empt difficult challenges.

The hon. Gentleman mentioned his experience at Thales, which is not far from my constituency and is still an appreciated employer. Many of my constituents work for Thales in Glasgow, but I do not know whether there is worker representation on the company’s board. Even if there is not, such representation is not necessarily what drives positive engagement. As hon. Members would agree, there are many companies out there that do not have worker representation on the board but that, none the less, manage to have very positive workplace relations, which is to be commended.

On directors, it is perfectly possible in UK law for a director to be responsible for ensuring that the views of employees are heard by the board, but having a director with a specific, legally defined responsibility for furthering employees’ interests may be unhelpful because it could risk directors pursuing competing interests, rather than coming together as a board to set common objectives for the company.

It would not be fair to portray the UK as having poor employee participation, and I have mentioned that many companies are good examples of such participation. Indeed, studies and research back that up. The latest report on employee involvement by the European Foundation for the Improvement of Living and Working Conditions shows that employee participation is high in the UK—across the EU, only the Scandinavian countries score higher. That backs up my point that formal legislative mechanisms are not the only means of achieving effective employee engagement.

Indeed, the Department for Business, Innovation and Skills recently supported a business-led initiative called “Engage for Success,” which outlines the benefits of employee engagement and provides practical best practice that businesses, large and small, may employ to improve the engagement levels of their work forces. Only one in three employees feels properly engaged in the workplace, so there are huge productivity gains to be realised. If the figure could be increased even to two in three, the UK economy would experience a significant boost. I encourage hon. Members to look at the “Engage for Success” website.

Engagement with employees is to be encouraged and promoted, but I would not go as far as prescribing that all companies should have worker participation on their board, which is perhaps not workable and not the best way to achieve the goals that we share.

Other EU member states have different board structures and systems of corporate governance, so we need a solution that works for the UK and our particular system of corporate governance and industrial relations, rather than a one-size-fits-all policy. The approach in Sweden and Norway, for example, is based on far greater levels of detailed negotiation and collective bargaining between employers and employees at all levels of company decision making. It is therefore simplistic to assume that we could just apply one element of such a system to the UK system.

The hon. Member for Paisley and Renfrewshire North is right to raise the issue of pay, because many hon. Members have been concerned about increased levels of executive pay in recent years. It has been excessive in many cases and the ratio between the earnings of those at the top versus those on the shop floor is also concerning. Directors’ pay in particular has ratcheted upwards, but, importantly, it has not been linked to performance. In a sense, there is nothing wrong with somebody being rewarded for a specific success, such as growing a company, providing new jobs or creating wealth for the economy, but where that reward is given when the company has not necessarily been experiencing particularly fantastic results, that needs to be questioned. Excessive pay for failure or for not bringing significant success damages the long-term interests of business.

We brought forward reforms, which came into force on 1 October, to create a more robust framework for the setting and reporting of directors’ pay. They will boost transparency, so that people can clearly and easily understand what those at the top of companies are paid. Importantly, the reforms will empower shareholders to hold companies to account through binding votes, creating a stronger, clearer link between pay and performance. We have already seen shareholders flexing their muscles in a much more welcome way on issues such as executive pay. It will take some time to see the full impact of the reforms, due to the voting and engagement patterns of investors, but there are already good examples of constructive dialogue between companies and investors.

More widely, the Government is committed to tackling short-termism through the recommendations of the Kay review. Earlier this month, the Government’s response to the Select Committee on Business, Innovation and Skills set out the progress made on this important agenda. Of particular help are our reforms, now in place, of narrative reporting and the governance of executive pay. We have also secured changes to EU law to end mandatory quarterly reporting by companies and will soon implement that reform in the UK.

The Financial Reporting Council updated the stewardship code last autumn to emphasise that investors should be focused on long-term company strategy and not just on governance arrangements, but more may need to be done. The FRC is undertaking a further review of the stewardship code with a view to strengthening its application and ensuring that it enhances engagement between investors and companies focused on long-term value creation. We have seen various initiatives from investment industry groups to develop good practice on stewardship, which we hope will continue, and on the disclosure of costs and charges in the investment chain. We have committed to publish next summer a full progress report on the delivery of the Kay review’s recommendations.

The hon. Member for Paisley and Renfrewshire North mentioned women on boards, and I agree that it is an important issue. Having more women on boards is important not only from the point of view of women or equality, but also in the same way that having more diversity of ethnicity, background and discipline is important.

One would not want a board comprised solely of accountants, lawyers, men or people who happen to be white. People bringing a diversity of views and experiences to a board can stop group think and make it a much stronger group that can really drive a company forward. Worker representation can lead to such diversity, but we should not necessarily mandate it. We want a mix of talents and experiences on boards to encourage higher performance. We are making good progress on gender diversity through the proposals put forward by Lord Davies in his excellent review.

The hon. Gentleman also mentioned the Government’s work on encouraging employee ownership, which is another way of encouraging employee participation in business. Last week, I launched the “The Nuttall review of employee ownership: one year on report”, which follows up on the recommendations of the Nuttall review. Many businesses are discovering that employee ownership can be an excellent model of governance that works incredibly well and that encourages an engaged and motivated work force.

The success stories include not only John Lewis, although it is obviously a great example, particularly given its increased sales at the moment, which can partly be put down to the rather fantastic bear and hare advert, but also Arup and the Baxi partnership—now Baxendale Ownership. A whole host of small companies up and down the country are showing the benefits of this particular model. It is perhaps not right for every business, but it is an important part of the mix, which is why we are supporting it further through tax breaks that we will announce more on shortly.

The hon. Gentleman suggested that we could promote employee representation through Government procurement or regulation, and we are open to further thinking about how to encourage that. Last month, the Government asked Professor Chris Ham of the King’s Fund to conduct a wide-ranging review of how best to encourage wider employee participation in health.