Shareholder v stakeholder

Australian Workers’ Union (AWU) National Secretary, Daniel Walton, believes employee representatives on boards could do more than identify labour-related risks. They would help transform company/employee collaboration and innovation.

Walton says a debate on employee-elected directors on boards is overdue. He wants industry, unions, governance associations, academics and other stakeholders to discuss different models of employee representation on boards - and local research on the topic.

“Australia has a massive problem with collaboration,” says Walton. “We still have an adversarial system from the 1960s of companies versus employees. We need a culture where companies and employees work together to innovate and create value. That has to start at the top in organisations through boards that have employee representatives as directors.”

Australia ranked 66th in cooperation in labour-employer relations, far behind most developed countries, in the latest World Economic Forum Global Competitiveness Report. Walton believes employee-elected directors on boards is a crucial first step to improve Australia’s international position on labour-employee relations and workplace collaboration generally.

Financial Sector Union (FSU) National Secretary, Julia Angrisano, believes employee-elected directors would address failings in the shareholder model of governance. “The ‘old boy’ network of sitting on each other’s boards is still far too prevalent,” she says. “ASX 200 companies need and will benefit from a diversity of views. The single board model (favoured in Australia and the United States) privileges the interests and rights of shareholders at the expense of other parties such as employees, suppliers and super funds.”

Momentum building

The push for employee-elected representatives on boards is building in Australia and overseas, amid renewed debate about “stakeholder capitalism” and the need for boards to serve the long-term interests of employees and other stakeholders, not only shareholders.

The UK Labour Party last year proposed all companies with more than 250 employees be required to have one third of their board comprised of employee representatives. If elected, the Labour Party will also change employee ownership of companies.

“We still have an adversarial system from the 1960s of companies versus employees. We need a culture where companies and employees work together to innovate and create value. That has to start at the top in organisations through boards that have employee representatives as directors.”

The revised UK Corporate Governance Code (effective January 1, 2019) already has a stronger focus on boards understanding the interests of employees. UK companies can choose one of three options (in the comply-or-explain code) on how they give employees more “voice” in the boardroom. This could include an employee-elected board member, workforce advisory board or the designation of a non-executive director to engage with employees.

Earlier this decade, France legislated that companies with 5,000 employees worldwide, or 1,000 in France, by law must have one employee representative on the board where there are up to 12 board members, and two on the board where there are 12 or more directors.

US Democratic Party Presidential hopeful Elizabeth Warren last year controversially proposed that large American corporations should let employees elect 40 per cent of their directors.

Prior to the 2019 Federal election, the Australian Labor Party said it would “… examine measures that increase collaboration between employers and workers, including worker representation on boards, giving consideration to global models currently in operation”. Had Labor won the election, a bigger push for employee-elected directors, possibly mirroring the international experience, would be underway.

European experience with co-determination models

German and Scandinavian countries have long had some employee directors on their boards. The two-tier board model in Germany includes a management board (which runs the company) and a supervisory board (which appoints the management board).

Depending on the organisation’s size, the supervisory board can have a third or half of its directors elected by employees. Shareholders elect the rest of the board. Supervisory boards range from three to 21 members, meaning up to 10 directors could be employee elected.

“The Europeans have been miles ahead of us on good corporate governance for decades,” says Angrisano. “In many European countries, the presence of employees, long-term shareholders and other stakeholders on company boards has acted as a powerful voice in guiding companies to long-term success. It has checked the power of opportunistic shareholders to force through hostile takeover bids and divestment. It has democratised corporations and delivered higher long-term investment, productivity, growth, research and development, wages and returns to stakeholders, all of which are necessary for building a fair and sustainable economy.”

Having employee-elected directors on Australian boards seems plausible, but is rife with complications. Germany has a long history with the concept of co-determination, which involves the rights of workers to participate in management of companies they work for.

Proponents of the German model of employee-elected representatives on boards say it has encouraged collaboration between workers and companies. “Having employee-elected directors helped European companies manage through some difficult situations and implement change,” says Walton. “That’s the benefit of employees having a greater say in the boardroom.”

Critics say the supervisory model has led to too much groupthink, too little diversity and cumbersome boards. Also, academic evidence on the German board is mixed. Comparisons of the two-tier German structure and one-tier model favoured in the United States, Australia and many other Western countries often find neither model is superior. Both have their pros and cons, and country-specific factors may influence the performance of both models.

A likelier outcome is convergence rather than divergence. That is, the two-tier model adopting aspects of the traditional western governance model, as has been the case in Germany this decade, and the one-tier model adopting aspects of European models, as political parties in the UK, US, Australia and elsewhere push for employee-elected directors. Were this model to evolve in Australia, boards of large listed companies might be expected to have one or two employee-elected directors. They would most likely be union representatives, as unions are best placed to mobilise employee votes on director elections, affecting board composition and adding a new boardroom dynamic.

The fear is executives and directors would be reluctant to discuss transformative strategies, such as a restructure that will spark job losses, with a union representative on the board. Also, that employee-elected directors may lack general business and board skills to govern across a range of areas, be change resistant or affect boardroom chemistry. Some boards might argue they can understand the needs of workers through employee advisory councils or other mechanisms to source and act on employee views. Formal appointment of employees to the board could be unnecessary or counterproductive.

Longer-term view

Walton believes these and other issues can be overcome with appropriate education and governance experience for employee-elected directors. “Other countries have made this model work. It’s demeaning to say employees cannot add value to a board because they haven’t been executives or had long governance experience. There are workers across the spectrum who have huge capability to add to governance and boardroom diversity.”

He says governance stakeholders can help manage the transition of employees onto boards through education initiatives and board pathways. “If we want employees to add value on boards, we need to ask: What governance training will they require? How can we get that training to them earlier in their career? How can we create opportunities for them to serve on smaller boards, committees or advisory councils so they have governance experience?”

Walton urges companies to be open-minded about the short- and long-term benefits of employee-elected directors. “I guarantee we wouldn’t have had a problem of wage underpayment in the franchising sector if an employee-elected director was on the board of those companies. Even a junior union official would have known to ask management if all staff were being paid fairly and informed the rest of the board on this risk.”

Angrisano says the Financial Services Royal Commission exposed corporate-governance shortcomings in the banking sector, resulting from a management failure to stop misconduct. “One outcome from the Royal Commission was the big-four banks having to go through a self-assessment process and they all have identified rigid and obsolete management and decision-making structures as contributing to poor governance and poor culture.” She believes having employee-elected representatives on bank boards would help address these issues.

Walton argues the main benefit of employee-elected directors is transformation. “In this era of industry disruption, companies will need to change faster than ever. The German coal industry, for example, had extensive support for retraining of employees who were made redundant, thanks to company/worker collaboration that began in the boardroom through employee-elected directors. This model will help Australian companies respond to disruption.”

Walton has canvassed the concept of employee-elected directors with stakeholders and says there is early support. “CEOs say to me, ‘show me how having employee-elected directors will create value’. Most realise that creating mechanisms for employees to have greater input and collaboration in company decision is valuable in the long term.”

He says the push for employee-elected directors must be well-researched and consultative. “We can’t rush towards such a big change for boards. We need rigorous research to determine what is the best model of employee-elected directors on boards, for an Australian context. Most of all, we need an extensive debate on this issue and stakeholders working together to find the best way for a stronger employee voice in the boardroom. The move towards employee-elected directors in Australia is inevitable, in my view. It needs to be managed.”