Employee Shareholding and Participation in Corporate Governance

Lord Haskel Excerpts

Thursday 11th October 2018 Lords Chamber

Asked by

[Lord Haskel]

To ask Her Majesty’s Government what assessment they have made of proposals for greater employee shareholding and participation in corporate governance.

[Lord Haskel (Lab)]

My Lords, this is a topic on which there is a surprising amount of agreement. It is because of the increasing erosion of public confidence in business that all the recent party conferences discussed it. They debated how to reshape business and shake up the way it works. It was caused by worries about the energy companies ripping off their loyal customers, and drew approval at both the Labour and Conservative party conferences. Disgust at the bonus paid to the chief executive of a housebuilding firm in York, which would pay to house all the homeless there, also drew cheers at both party conferences. This puts intervention by government on to the political agenda.

So what is to be done? There seems to be a degree of unanimity. Both parties agree on the need for greater boardroom diversity, with employees being an essential part of that diversity. Employee shareholding has been Labour and Liberal Democrat policy for some time, and only the other day a past deputy chairman of the Conservative Party suggested that there should be tax incentives for those who share profits and equity with staff. It is right that there should be agreement on this. Recent research concluded that we all benefit: employees benefit through a better sense of fairness, motivation and well-being, companies from unlocking exceptional levels of discretionary effort, and society benefits too. Research also shows that companies which have 3% or more of their share capital held for the benefit of employees regularly outperform other companies. So it is not difficult to draw the conclusion that employee shareholding and involvement in corporate governance is a characteristic of the successful, well-run business.

This is not new: 40 years ago, I introduced these principles in the business I was building, and I was not the exception. Governments have introduced it—our postman got shares when Royal Mail was privatised. However, the Enterprise Act 2013, designed to encourage employee shareholding, has had hardly any firms adopting its provisions. I think that this is because a sense of ownership is not enough. There also has to be a share of power, some say in policy. All this comes together in what many refer to as stakeholder capitalism, or business with a purpose—a shared sense of purpose not only within the business, but with society, customers, suppliers and all who are affected by the business, large or small.

I am grateful to the Financial Reporting Council for sending me its updated corporate governance code, because it too recommends engagement through directors appointed from the workforce and places particular emphasis on the relationship with a wider range of stakeholders. The Companies Act already calls on companies to behave in this way. There are new regulations that will require companies to report on salary ratios, engagement with employees and better corporate governance.

Fortunately, there are some schemes designed to help this work—to help workers be responsible shareholders and directors, in trying not only to raise productivity, but to make their places of work more purposeful. One of these is Be the Business, chaired by Charlie Mayfield. I declare that I am a member of it. Be the Business provides tutoring and mentoring by experienced executives from many of our successful companies—interventions that are already giving firms a boost, particularly SMEs. Be the Business also creates business improvement networks that enable best practice to be shared between firms that would otherwise not be exposed to more efficient ways of working.

The Government’s industrial strategy—noble Lords might remember that—if it is ever put into practice would target solutions aimed at raising productivity, but employee shareholding and participation in corporate governance hardly feature. Of course, worker directors and shareholders have every incentive to raise productivity because this is the key to higher wages, but the tutoring, mentoring and sharing of best practice could have been a very helpful recommendation made to the Government by the promised industrial strategy council, which has yet to meet.

With increasing knowledge and understanding, maybe worker shareholders will ask more searching questions, such as why boards authorise share buybacks instead of investing to raise productivity. Firms might also welcome shareholders who are not algorithms with trading strategies entirely unrelated to the business and where average holding is now measured in hours and minutes, not months and years.

Tomorrow’s Company—an expert in this field—tells us that, in its experience, the value of employee ownership and involvement very much depends on the degree of their involvement and their influence on the leadership of the company. The Financial Reporting Council currently has no statutory power to sanction companies for failing to comply with its code. So a lot depends on how rigorously these codes and regulations are enforced. The French think that it should be compulsory and in France there are strict laws about profit-sharing and worker representation on boards. It is similar in Germany. It does not seem to have done their economies any harm. In fact, some think that this is one reason why their productivity is well ahead of ours.

Light-touch regulation might be more acceptable to some, but in many cases it does not work. Obviously the extra force of law helps boards to challenge the company executives, hopefully spot trouble early and insist that is dealt with. Many wish that this had happened at Carillion. Labour’s proposals for a compulsory scheme of employee shareholding is on the right lines, but I would like to see it combined with an equally strong enforcement of the new code from the Financial Reporting Council.

These are Labour ideas that go back a long way. They were included in our 2017 election manifesto. In her newspaper article last weekend the Prime Minister suggested that in some things we should join her. In this matter the shoe is on the other foot. Instead of borrowing our ideas, why not join with us and help develop them? My question to the Government is: will they join us and give employee share ownership and participation in corporate governance the force of law? Join us to help rebuild the confidence and trust in business that we all agree is so essential to our future, because, whatever the outcome of the Brexit negotiations, these structural economic problems will still need to be solved. They will not go away.

I thank all noble Lords for participating in this debate. I look forward to hearing what everybody has to say and to the Government’s response.