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Whose company is it anyway?

Janet Williamson puts the case for workers' voice in the boardroom

It is an important principle of natural justice and democracy that those affected by decisions should have some say in the making of those decisions. Not a veto, but a voice. In many areas of our lives, this basic principle is taken for granted. From it stems our right to elect people to represent us in local, national and European government. It is reflected in the governance arrangements of many institutions, including schools, where it is well-established that teachers and parents should be represented on governing bodies, pupils selected by their peers feed in views through school councils.

On entering the workplace, this basic tenet of democracy is left at the door. Despite the fact that those in full-time employment spend a massive proportion of their waking hours at work, workers have no automatic right to influence the decisions that are taken there. In the UK, many workers are not even informed and consulted in advance about changes to workplace strategy or organisation. Employers are only required to inform and consult their workers if such rights have been 'triggered' by a request from at least 10% of the workforce which in a non-unionised workplace is a pretty high barrier to what should be basic rights for all.

In the private sector, the UK's system of company law and corporate governance puts the interests and rights of shareholders at its heart. Shareholders elect company directors, now annually; they vote on resolutions and can file resolutions at company AGMs; they have a vote, now binding, on remuneration reports. Directors are required to prioritise the interests of shareholders, while workers have no voice or representation in company decision-making.

When scandals about soaring executive pay or other concerns regarding corporate behaviour hit the headlines, the response from successive Governments has been along the lines of: 'It's a matter for the company and its shareholders.'

Changes in the patterns of share ownership in recent years present major challenges to the reliance on shareholder rights and oversight within the UK's corporate governance system. Institutional investors such as pension funds and insurance companies that have an interest in long-term investment returns hold a declining share of UK company shares down from over 40% in 1998 to less than 11% today. In contrast, over half of UK shares are now held by overseas investors, whose ideas about how companies should be run may be informed by their own national context rather than that of the UK. Institutional investors hold highly diversified portfolios of hundreds if not thousands of shares, making it impossible for their staff to engage with all the companies whose shares they hold over the range of issues for which shareholders are ultimately responsible.

In much of Continental Europe, it's different. In 19 European countries, including many of Europe's most successful economies such as Germany, the Netherlands, Austria and Denmark, workers have the right to be represented on company boards. In 14 of these countries, these rights are extensive, in that they apply to the majority of private companies (in the other five they are limited mainly to state-owned companies). Significantly, they apply in countries like Sweden that have a unitary board system (ie, a single board of directors) like the UK, as well as in countries like Germany that have a two-tier board system (ie, with an executive management board and a supervisory board which is almost entirely non-executive). They also apply in a growing number of countries that allow companies to choose between the two board structures.

Back in the 1970s, fuelled in part by the examples from Continental Europe, the British trade union movement engaged in serious debate on options for introducing a model of industrial democracy in the UK. While some feared that there could be a potential conflict between board representation and collective bargaining, the TUC General Council argued that

'It is clear that ... a wide range of fundamental managerial decisions affecting workpeople ... are beyond the control and very largely beyond the influence of workpeople and trade unions...Major decisions on investment, location, closures, takeovers and mergers, and product specialisation of the organisation are generally taken at levels where collective bargaining does not take place...New forms of control are needed...the Companies Act should be altered so as to provide for...worker-participation at board level'.

This was part of the TUC's submission to the Committee of Inquiry on Industrial Democracy set up by the Labour Government of the day and chaired by Lord Bullock. The Bullock Committee reported in 1977 with recommendations for establishing worker representation on boards in the UK. The Government responded with a White Paper setting out proposals both for the right for discussion of company strategy and the right to board level representation for workers. The Queen's Speech in November 1978 stated that following further consultation legislation would be introduced to implement these proposals. In May 1979 the election of a Conservative Government-led by Margaret Thatcher brought an abrupt end to plans to extend workers' voice and influence, ushering in a period of sustained attack on the rights of workers and trade unions from which our movement has not yet fully recovered.

2014 marks 40 years since the TUC quote above was written. Yet it is as true now as it was then; the TUC believes that it is time to breathe life once again into the campaign for worker democracy and representation on company boards.

There is a strong economic and social case for such change. The interests of workers are well-correlated with long-term company success, so worker voice can help boards prioritise the long-term success of the company in decision making. Workers also bring to the board in-depth knowledge of the company they work for and the environment in which it operates, making them well-placed to contribute to strategic and operational decisions. It is indeed the case that countries with strong worker participation rights and practices (on board representation, workplace representation and collective bargaining) score more highly than countries with weak worker participation rights over a range of important measures, including R&D expenditure, employment rates educational participation among young people, and have lower rates of poverty and inequality.

While shareholders can and do spread their investments thinly to protect themselves from risk, workers cannot simply leave one job and walk into another. Workers invest their labour, skills and commitment in the company they work for, and if this investment goes wrong they pay a heavy price the loss of their livelihood. It cannot be right for workers to carry disproportionate risk in relation to company decision-making yet have no chance to influence it.

The TUC is determined to start a debate on workplace democracy within the labour movement and more broadly, and has produced two new reports on the issue. Workers on Board - The case for workers' voice in corporate governance makes the case for worker representation on company boards, while Workers' Voice in Corporate Governance - A European Perspective sets out the situation across Europe. Both are available on the TUC website.

The TUC believes that economic democracy is an essential component of economic success and social justice. Promoting worker representation on company boards will be an important part of our campaigning for progressive change in the months and years ahead.

Janet Williamson is senior policy officer with responsibility for corporate governance at the Trades Union Congress (TUC).