Employee Shareholding and Participation in Corporate Governance

Lord Lea of Crondall Excerpts

Thursday 11th October 2018 Lords Chamber

[Lord Lea of Crondall (Lab)]

My Lords, this is a subject on which the Prime Minister is beating a quick retreat since she referred to it rather positively a couple of years ago. The slew of reports recently proved that it is becoming part of a new consensus, but I think it is still not quite part of the consensus in the golf club bar. This is typical of this country’s problems, in some respects. It is summed up, as I understand it, although I am not a lawyer, in the surprising but true doctrine that the company is the shareholders. That is what a company is. Is that not extraordinary?

The stakeholder model of capitalism is rather different from the British model. I will elucidate one or two consequences of this. My noble friend Lord Monks, in his interesting anecdote about Rotterdam, prompts me to give the House my favourite anecdote. A friend of mine went over to Gothenburg. His company wanted to take over a Swedish company. At lunch, round a canteen table, they had the worker representatives from both the main supervisory board, I suppose you would call it, and the works council. If your Lordships will forgive my Swedish accent, although I am rather proud of it myself, when it came to questions, the chairman of the works council said, “Mr Struthers, if you take over our company, how will that improve our world market share?”. When Malcolm got home, he said, “Do you know what happened to me in Gothenburg? I asked these people if there were any questions, and this man asked”—I will not repeat my Swedish accent, your Lordships will be relieved to hear—“about world market share. I have never heard anybody ask any question remotely like that in this country”. Am I not right? This is the division. I will not refer to this not being popular among those of my former colleagues who believe in the class struggle as an end in itself, but it is part of the consensus of the trade union movement now, in a very broad sense.

The slew of reports proves that more than 40 years since Bullock, the analysis of the nature of British inequality has moved on to become a consensus. These reports are hugely significant, not only in what they all say in similar terms but in the range of who has written them. We will not specify but it is a fact that although the Bullock committee report was greeted with ridicule 40 years ago in most establishment quarters, all I can say in the presence of the right reverend Prelate the Bishop of St Albans is that although our reward is only in heaven, in this case I hope the reward will come within 50 years. I strongly endorse the idea, which had not occurred to me, from the noble Lord, Lord Greaves, that we should all indicate in unison to the noble Lord, Lord McFall, that this would make an excellent subject for a special inquiry.

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[Baroness Vere of Norbiton (Con)]

My Lords, I thank the noble Lord, Lord Haskel, for securing this important and timely debate. Giving employees a stake and a voice in the organisation that they work for is important. As the noble Lord very powerfully noted in his opening remarks, it can lead to better outcomes for all stakeholders—employees, shareholders, customers, suppliers and, indeed, the Exchequer—through better-quality boardroom decision-making, stronger worker commitment to the business, higher productivity and greater influence of workers over the strategic decisions that will affect them. This has been noted by many people, not just in the Chamber today but outside. This debate is indeed very timely. The IPPR report has recently come out. It was mentioned by the right reverend Prelate and the noble Lord, Lord Stevenson.

We can all agree that employees are the lifeblood of all successful organisations and that their participation is crucial. Where I suspect we will disagree is on how government should encourage—some would prefer “force”—listed and non-listed privately owned companies to increase employee participation. Some in today’s debate—I note the comments of the noble Lord, Lord Stevenson—have criticised the speed at which the Government are acting. I cannot agree.

I will turn first to worker participation in corporate governance. As the noble Lord, Lord Stevenson, noted, the recent comments by Andy Haldane, the chief economist of the Bank of England, are welcome and timely. I am sure that noble Lords were very pleased to see his appointment as chair of the Industrial Strategy Council announced a few days ago. That council will meet for the first time in a couple of weeks’ time.

In 2016, we consulted on the Corporate Governance Reform Green Paper which, among many other things, sought views on how best to strengthen the worker voice in the boardroom. It was an extensive consultation. There were 375 thoughtful responses from businesses, trade unions and wider society. One thing was particularly striking from the responses: that no single way is the best way to strengthen the employee voice and influence at board level. Some companies favour the direct appointment of employees to company boards. Others favour dedicated and diverse workers’ councils which can reach into all aspects of the organisation. There is a huge range of approaches, each suiting the specific needs of the company, its structure and the sector in which it operates. So it became clear to us over the course of the consultation that one method would not suit all and that it would be wrong, and possibly quite damaging, for the Government to dictate a single method of worker participation.

[Lord Lea of Crondall]

Does the doctrine of diversity not mean that the Government are ruling out, almost for all time, any legislation?

[Baroness Vere of Norbiton]

Not at all—but at this moment legislation is not needed. If I am allowed to make a bit of progress I will explain how this is being put into practice.

Our reforms achieve change not by forcing companies into a one-size-fits-all approach but by providing options, supported by a clear and transparent accountability system. There are two main elements to our approach. First, we have put new reporting requirements on the statute book. They require all large companies—those with more than 250 UK employees—to explain in their directors’ reports how they have had regard to the interests of employees, including how they have engaged with them and, crucially, the effect of that engagement on decisions taken by the board during the year.

Secondly, at the Government’s request the Financial Reporting Council has revised the UK Corporate Governance Code to require boards to have in place at least one of three worker voice mechanisms: a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. If a board has not chosen one of those methods, it will have to explain to its shareholders what alternative arrangements are in place and why they are effective.

The noble Lord, Lord Haskel, questioned the statutory underpinning of the code. It is mandatory for all listed companies. Noble Lords will be aware that Sir John Kingman is reviewing the FRC and all its activities, and we look forward to receiving his report in due course.

The Government expect these reforms to drive real change, with our large companies having effective mechanisms in place to engage with employees at boardroom level.

Many noble Lords on the Labour Benches have spoken in today’s debate and talked about Labour Party policy in this area. What do we see? We see exactly what the consultation showed us would not work. Labour is proposing a one-size-fits-all approach which we know will not suit many companies. Labour would force all large companies to do exactly the same thing, irrespective of their type, size, ownership and sector. For the reasons I have set out, we believe this would be wrong. Indeed, the personal experiences shared in the Chamber today by the noble Lord, Lord Monks, Lord Cotter, Lord Lea and Lord Davies, further support our view that one size simply does not fit all.

I turn to employee shareholding and ownership. Many businesses choose employee share ownership to involve and motivate their employees. But, crucially, employee share ownership must remain a free choice for businesses to make. However, the Government have a role to play. We can remove the barriers to employee shareholding and to employee ownership to make these easier for business. The Nuttall review in 2012, commissioned by the previous Government, identified three barriers to growth: a lack of awareness of the concept, a lack of resources to support implementation, and actual or perceived legal, tax or other regulatory barriers. The review made 28 recommendations, and these have been addressed by the Government in awareness-raising initiatives and by simplifying the relevant regulations through changes in the Finance Act 2014. So we have tackled the barriers; it is now up to the private sector to set this up and help employees to participate.

This Government back businesses, whichever ownership model they have. It is in that context that we keep under review our approach to employee share ownership schemes. I noted the comments by the noble Baroness, Lady Bowles of Berkhamsted. I have read her very good report, and one thing that struck me was that she said:

“That is not to say employee ownership is the ‘ideal’ business model, or that its impact is automatically and universally transformative”.


She is right, and that point was made also by the noble Lord, Lord Liddle. We have to be aware of people investing not only their job in a company but also perhaps their life savings.

However, we would like to see more employee-owned companies, and we have noted the recommendations. The Government keep all areas of the tax system under review and, I am sure, are looking at the proposal that the noble Baroness mentioned that was sent recently to HMT. We already offer four tax-advantaged employee share schemes that allow 4 million employees to invest in the future performance of their companies. This is alongside employee ownership trusts, which the Government have promoted since in 2014 and which offer generous tax reliefs both for employees and for business owners who sell to a trust.

Perhaps it is worth taking a moment to look at Labour Party policy in this area, which was cited by a number of noble Lords today. It is certainly radical. It would involve an immediate and significant diminution to the pension assets of all pension holders, and indeed anyone with any shares in a larger listed company. It would be an astonishing confiscation of private wealth. There would be no actual employee share ownership, merely ownership by proxy, and a cap on any upside for the employee. I wonder whether noble Lords on the opposition Benches have any estimate of quite how much extra tax the Exchequer would get as a result of this cap. Some say that it would be around £6 billion— that is, £6 billion of extra corporation tax targeted only at companies with a high dividend yield. The policy is extraordinary, and not in a good way. It would have a devastating impact on UK business and the UK as an attractive place to invest.

Noble Lords touched briefly on Section 172 of the Companies Act 2006, which is the cornerstone of the company law framework. Directors have a duty to promote the success of a company for the benefit of their shareholders. However, in doing so they must have regard to a range of stakeholders. This is the enlightened shareholder value model and we are not minded to review it at this time.

The UK has an international reputation for the strength of its corporate governance framework, which we have kept up to date with reviews and carefully considered improvements. As the noble Lord, Lord Monks, suggested, we will look at best practice in other countries, but a one-size-fits-all approach will not work.