How employee directors add value
Directors’ duties to ‘have regard to’ a wide range of stakeholders has been with us since the Companies Act (2006). Stakeholders includes company employees.
The revised Corporate Governance Code expects listed companies to use one or more of these methods for their workforce engagement:
- a director appointed from the workforce;
- a formal workforce advisory panel; and/or
- a designated non-executive director.
It won’t be long before some companies are required to report how directors have fulfilled this duty.
It’s a similar story in the new Wates Principles for Large Private Companies. The guidance references to meaningful two-way dialogue enabling the workforce to share ideas and concerns with senior management.
Current thinking and practice
Despite all of this attention on engagement, the question of employee directors still tends to be viewed with suspicion in the UK. However, other countries take a positive approach. Employee directors are commonplace across Europe and they are compulsory in some member states. True, these companies tend to have two-tier boards rather than single unitary boards, but that isn’t a good enough reason to dismiss the idea out of hand. Remember, boards which appoint an employee director will show real commitment to diversity and this is another key trend in UK corporate governance.
How employee directors add value
The ICAEW paper on how employee directors add value has a radical starting point. We have imagined that we are a company which has already decided to put an employee director on its unitary board. Identifying the value of employee directors persuaded us that this was the right starting point. Companies will thrive and modernise when they see employees’ views as central rather than as peripheral. At the moment employees are unlikely to know the risks and opportunities being considered by their company’s board even though they could have constructive insights and important warnings. Talented candidates may be attracted to join companies which have employee directors if they see this as part of their ideal career path, and building a company where people want to work supports creating products that customers want to buy and delivering services customer want to use. Employee directors could perform niche roles, eg, acting as media spokespeople at times of crisis or change.
Our action plan for boards does not shy away from the common concerns relating to employee directors, such as fears that commercial confidentiality won’t be respected, concern about inhibiting board’s ability to take tough employment decisions, and how to select a single or limited number of employee directors from a diverse, multisite or multinational workforce. However, we put these actual and perceived hurdles in perspective.
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