Company Boards

Jo Swinson Excerpts

Tuesday 26th November 2013 Westminster Hall

[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?

--- 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.