The Code directly affects the way that companies operate and make decisions. So it matters.
The publication today of a revised version of the Code – out for consultation – is the latest step in the government’s corporate governance reforms that started in July 2016 with the Prime Minister saying that she was going to put workers (and consumers) on company boards.
We have charted the government’s disappointing retreat from this sensible and long overdue proposal. The final confirmation of the u-turn on this came in the summer, when the government set out its final corporate governance proposals, following its earlier consultation.
On worker directors, the revised Code simply implements the government’s policy set out in the summer.
So, there is a new Code provision which states that ‘The board should establish a method for gathering the views of the workforce’, and goes on to stipulate that this would normally be ‘a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director’.
Put like this, none of these options are satisfactory. To maximise the effectiveness of worker directors, it is essential that they are elected by the workforce, rather than chosen by management, and there should be a minimum of two to avoid the risk of being a lone voice on the board.
A formal workforce advisory panel must include trade unions where they exist (and many large listed companies do recognise unions) and not cut across established channels for collective bargaining. It is essential that the final version of the Code makes this clear.
The final option – designating a non-executive director – will widely be perceived as a continuation of the status quo and risks being just that.
The TUC will be encouraging all companies to implement this provision by including at least two worker directors, elected by the workforce, on their boards.
But the government’s inability to follow through on its own proposal should not obscure other areas where the revised Code has a welcome shift of emphasis.
The previous code barely mentioned stakeholders or the workforce; its focus was firmly on the relationship between company directors and shareholders. The revised Code includes a new focus on stakeholder engagement and the importance of companies seeking the views of the workforce.
Principle D states that ‘The workforce should be able to raise concerns in relation to management and colleagues’ and principle C that ‘the board should ensure effective engagement with, and encourage participation from, [shareholders and stakeholders].
The use of the term ‘workforce’ is important. Employment relationships have become increasingly fragmented, with long and complex supply chains for the provision of labour and the increased use of agencies, umbrella companies and personal service companies. The Guidance that accompanies the Code addresses this explicitly, saying that ‘communication and engagement should involve the whole workforce, not just employees’, mentioning remote workers, agency workers and contractors.
At the moment, companies can – and do – hide behind this distinction. Some company reports include information only on their directly-employed workforce, rather than on all those who are involved in producing the company’s products or services – even when this means excluding the vast majority of the workforce from scope.
It’s absolutely right that the Code talks about workforce engagement, not employee engagement – an apparently subtle, but in fact significant, distinction.
An important omission is that the section on relations with the workforce, included in the accompanying guidance to the Code, fails to mention trade unions. This must change in the final version.
Trade unions allow workers to express views collectively, thus providing an effective channel through which management or the board can engage.
They allow workers to express views anonymously and therefore accurately. Without unions, it’s very hard to for a company board to be sure what its workforce really thinks about their company.
And they already play a vital role within many of the UK’s most successful listed companies – so it’s confusing and unhelpful for working with unions not to be explicitly mentioned in the Code, or at the very least in the guidance.
Finally, remuneration. The big disappointment in remuneration policy – which again stems from the government’s proposals in the summer – is that there is not to be a major shake up of long-term incentive plans or LTIPS, which currently comprise the majority of remuneration.
The most significant innovation in the revised Code is to require the remuneration committee to oversee ‘workforce policies and practices’. The intention here is a good one – to ensure that remuneration committees take into account workforce pay and conditions when setting executive pay. They have been required to do this since the 1990s, but have consistently failed to do so, resulting in a growing and unjustifiable gap between workforce and executive pay.
There is a danger, however, that this could cut across existing collective bargaining arrangements, which, given collective bargaining is the best way of protecting workforce pay and conditions, would be entirely counterproductive. This should be addressed in the final version of the Code.
It has not heralded in workers on boards and there are areas that need to be strengthened. And enforcement remains a key area of weakness. But the revised Code includes for the first time an acknowledgement of the importance of stakeholder relationships and workforce voice and the contribution that these make to long-term company success. This is a welcome change of emphasis.
For some companies, implementing the revised Code properly will be a challenge. This is exactly as it should be, because the real test of the revised Code will be whether it changes corporate practice towards workers and other stakeholders – for the better.