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The case for appointing employees to board positions

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

Only a few UK companies have brought employees on to their boards despite a change in the UK Corporate Governance Code that encourages such appointments.

Since 2019, companies have been able to choose from three options: adding worker-directors; introducing an employee advisory panel, or appointing a designated non-executive director. Companies that do not comply are obliged to explain their reasons to investors.

Five FTSE 350 businesses now have worker-directors, says a report by the Financial Reporting Council, which sets the code. These are FirstGroup, Capita, Mears Group, Wetherspoons and Frasers Group, the retail conglomerate.

The Institute of Directors approves of the decision not to require all companies to take on worker-directors, which was the proposal put forward in 2016 by Theresa May, the former prime minister.

It should be a decision for each company to make, says Roger Barker, director of policy and governance at the IoD. He says, however: “It could be a very positive step to gain a workforce perspective in board decision-making.”

Labour market shortages could prompt more companies to appoint worker directors, says Nita Clarke, director at the Involvement & Participation Association, co-author of the FRC report. She says that younger workers have the skills that companies need, and that they prefer inclusive employers to those that are hierarchical.

Workers on boards are the norm in most EU countries, says Janet Williamson, senior policy officer for business and corporate governance at the Trades Union Congress.

Sweden has similar corporate governance structures to the UK and serves as a useful example, she says. About a quarter of board members on Swedish-listed companies are employee representatives, according to PwC data. The TUC would like worker-directors to make up a third of all boards in companies with more than 250 staff.

Workers generally want the business to be a long-term success and can improve board diversity, particularly with regard to socioeconomic and professional backgrounds, says Williamson.

Most companies, however, have chosen the option of designating a non-executive director to take responsibility for workforce engagement, according to FTSE 350 Boardroom Bellwether, a survey by the Financial Times and the Chartered Governance Institute UK & Ireland, published in the summer. Advisory panels of employees are also popular.

Companies with the weakest practices typically rely on non-executive directors or do not comply with the code, according to an FRC review last year.

About one in five designated NEDs had worked in a human resources role. None had experience as a trade unionist or workforce representative, the report found.

In October, David Lowden, chairman of Capita, described the appointment of two worker-directors in 2019 as a “breath of fresh air”, adding that their contribution helped the outsourcing company to weather the pandemic.

Federated Hermes, a large asset manager, encourages companies to consider appointing employees to the board. Amy Wilson of EOS, Federated Hermes’ stewardship business, says that customer-facing companies that depend on skilled or creative workforces, or those that serve people who have little in common with a typical board member, could benefit from worker-directors. She cited the fashion sector as an example.

Some 84 per cent of directors say the changes in the corporate governance code have improved their awareness of workforce views, according to Boardroom Bellwether.

Royal London Asset Management, a large investor, says that boards must do a better job of understanding corporate culture and the needs of the workforce.

The FRC review found that some worker-directors are appointed by the existing board while others are elected by colleagues. Barker of the IoD says European companies often appoint a trade union representative.

Whichever approach they take, Barker says, boards that consider the appointment of worker-directors should look at how they will be recruited and trained, especially given directors’ increasing responsibilities.

Individuals should also understand their legal duty, which requires them to consider the organisation as a whole and not simply the view of the workforce, Barker adds.

This article is based on a story written by Neanda Salvaterra for Agenda.

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