Putting workers on the board is a bitter but necessary pill | Nils Pratley | Business

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Many of the arguments in the IPPR’s prosperity and economic justice report would probably raise a cheer or two in big British boardrooms. Not every director is a wild advocate for the shareholder-first version of capitalism that the report diagnoses as a major failing in the UK economy. Far-sighted business folk happily concede that short-term horizons can lead unhappily to under-investment and the pursuit of impossible targets.

It’s just that, when it comes to one specific recommendation in the IPPR’s report, one can hear the howls of outrage already. The idea that large companies of more than 250 employees should have at least two elected workers on both their main board and their remuneration committee will be damned as unworkable, naive and a certain route to making companies uncompetitive.

That response, remember, greeted Theresa May when, in the period before she lost her parliamentary majority, she enthused about workers on boards. The prime minister’s idea was squashed in stages by the corporate lobby, to be replaced by a limp government proposal to give one existing non-executive director the additional role of looking out for workers’ interests. The revised formulation is so loose as to be meaningless.

Opponents of workers on boards should read the IPPR report with fresh eyes. It makes some clear-headed arguments for thinking again about giving workers a real voice in the boardroom.

First, the report makes the point that worker representation is not nearly as radical as made out. In 13 European countries, including Germany, France, the Netherlands and Ireland, workers have significant rights of representation in the private sector. Yes, there are examples where the arrangement has gone spectacularly wrong – a sub-plot to the Volkswagen emissions scandal was a cosy relationship between executives in search of bonuses and union bosses in pursuit of job guarantees. But, in general, there’s a strong correlation between worker representation and engagement. The UK tends to score terribly on the latter.

Second, the idea that a company owes its only true allegiance to its shareholders doesn’t reflect the relative risks. Shareholders, especially when they are really fund managers, are an ever-changing cast with diversified risks and no fear of bankruptcy. Workers, by contrast, have their livelihoods at stake and, usually, a longer relationship with the company. A governance model that tries to balance the various interests looks fundamentally fairer. Why should promoting “shareholder value” above all else be the over-riding duty of the directors?

The third point covers executive pay, the poison that has done most to erode trust in business. “Executive pay appears to be more a reflection of who decides it – the corporate governance arrangements – than of company performance,” says the report, giving an excellent summary of what’s happened in the past 25 years. Putting workers on pay committees wouldn’t necessarily slow the gravy train. But a more diverse set of decision-makers would surely be an improvement on the current you-scratch-my-back set-up in which the non-executive class is drawn primarily from other companies’ executives.

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In the end, opponents of worker-directors usually argue that the UK’s tradition of unitary boards makes reform impossible. That technical objection currently carries some weight but it should be a surmountable obstacle. Tweak the Companies Act, to redefine a company’s responsibilities beyond the promotion of shareholders’ interests, suggests the report. The thinktank is not the first body to make that proposal, but the idea is sound.

Nobody, of course, should pretend that putting workers on boards is an easy cure for all the woes of low productivity, low investment, short-termism and high rates of pay inequality. But the sense of unfairness in current governance arrangements is strong. The balance of power within companies looks out of whack and boards would be wise to wake up. The IPPR is pushing in the right direction and May, before she was overwhelmed by Brexit, was on to something.

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