Board room reshuffle

Sarah Henchoz

boardIn the run-up to being appointed as Prime Minister, Theresa May has announced that she plans to change the way in which corporates are governed by requiring companies to put both consumers and employees on the Board of Directors.

While a limited number of companies do open up their management to employee scrutiny in this way, for the vast majority, management decisions are made without much transparency for those affected by such decisions. While employee representation on the board is a largely alien concept in the UK, it is a model our German colleagues have been operating since the Second World War (when, ironically, it was imposed by the British government as a way of increasing governance and transparency). In Germany, companies with over 500 employees have a two-tiered board structure, with a supervisory board consisting of at least one-third employee representatives (this increases to half if the company has over 2,000 employees) and then a management board which is elected by the supervisory board (and thus continues to be heavily influenced by employees and shareholders). While the management board has day-to-day control of the company, the supervisory board is required to opine on key strategic matters such as disposals and acquisitions and executive pay.

Theresa May’s proposals have not yet been fleshed out so it is not clear if she would look to replicate such a two-tiered approach, or indeed whether all companies would be caught or only those over a certain size, or within a particular category, eg FTSE 100 or 350 companies. Nor is it clear how many employees would need to be on the board to satisfy these requirements, and whether they would be directors who owed fiduciary duties in the same way as existing directors. However, it is clear that employees will have a voice at the top table, will be party to deciding the strategic direction of the company, how it invests its money, and who the other directors should be.

If these new employee-directors are to be full directors in the Companies Act sense, they will also be accountable to shareholders, customers and the rest of the workforce in the event of the company failing or if there are public scandals, which they have not taken all reasonable steps to prevent. This raises further interesting questions around indemnities and directors & officers liability insurance, not to mention the need for more robust contractual confidentiality provisions.

Mrs May is also proposing a binding shareholder vote on executive pay to replace the current position under which such a vote is only advisory in nature. Further, she proposes that companies should be required to publish the differential between the pay of their CEO and the pay of an average worker. These initiatives, coupled with the gender pay reporting obligations which are expected to come into force in the autumn, also increase transparency, as well as providing a renewed focus on diversity.

Once the details are known, there will be challenges for companies to navigate how to make these proposals work in practice, but nonetheless it is an encouraging sign of future transparent and diverse corporate governance.

Comments published on Employment Talk do not necessarily reflect the views of Allen & Overy.

Read comments below or add a comment
  1. Robert Bendix says:

    Dear Ms Henchoz,

    I read this blog as somebody with a strong interest in both employment law and Allen and Overy as a law firm.

    I would like to ask you a question, but I wish to address a perspective firstly. I strongly agree that Mrs May’s proposals increase a transparent policy in the corporate world regarding pay and differences concerning gender pay, but do you believe the two-tier board system of corporate governance would curb remuneration given to senior executives?

    As a respondent to your blog, I feel I should say that I personally doubt that it would be a sufficiently significant step in doing so, since a German chief executive earns €4.7 million on average, 147 times the average pay of an employee, €32,000. This is more than the average difference in pay between British chief executive officers and workers, namely 84 times favourable to CEOs; £2.92 million for them on average as opposed to £34,417 on average for workers.

    This is solely an opinion, which is I cannot conclude that these proposals go far enough due to failure on the face of them to tackle the CEO to worker pay ratio.

    Yours sincerely
    Robert Bendix

    • Sarah Henchoz says:

      Thank you for your comment. The existing limitations on remuneration depends on what sector the company is in – for example in the financial services section the UK Remuneration Code already places a number of constraints on pay. For publicly listed companies shareholder opinion is taken into account when setting executive pay and there have been several examples where shareholders have made their views on proposals very clear. As you say, it is not necessarily the case that having employee representation on boards (or, indeed, Theresa May’s other proposals) will drastically change executive pay structures, but they will bring with them greater transparency and accountability, requiring companies to justify executive pay decisions in a way that they may not currently be required to do.

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