UK Prime Minister Theresa May has recently backtracked on her proposals to increase employee representation on boards. It was an idea which had largely been confined to the wilderness of UK governance for several decades after seeing its heyday in the 1970s with the publication of the Bullock Report. Mrs May’s proposal has been lauded and criticised in equal measures, and it is unclear now whether it will be abandoned altogether or merely watered down.

workers on demonstration, focus point on center of the photo

Given the increasingly visible disparities between the pay of executives and employees, and a US election largely characterised by discussions over income inequality and the outsourcing of jobs overseas, it is perhaps unsurprising that the question of employee representation on boards is back in the spotlight. There is widespread sentiment that public companies are not adequately serving all their stakeholders, and that increased worker voice could in some way enhance the ‘social licence’ of companies to operate. But what are the effects of such moves on the board’s ability to oversee the business, and ultimately on shareholder value?

Two of the most frequently made objections to employee directors relate to qualifications and allegiances. Directors are typically nominated by the existing board for the experience they could bring and skill gaps they could fill on the board. There is a risk, then, of underqualified directors being appointed, and the board’s primary oversight function being subverted in favour of representativeness. Though it should be noted that in markets with more concentrated ownership structures, such as France, it is common practice for representatives of a variety of significant shareholders to sit on the board. Catastrophe has not struck yet.

There is also the question of to whom these employee directors would owe their fiduciary duty. They would presumably be primarily chosen by and accountable to employees, yet under section 172 of the Companies Act 2000, directors are entrusted with “the success of the company for the benefit of its members [shareholders] as a whole”, while “having regard” to employee interests. Indeed, in a recent green paper the government highlighted the UK’s traditional reliance on “a unitary board system where all the directors have the same set of duties, and collective responsibility applies.” Further clarity would be needed on this point, particularly regarding the extent to which employee directors should consider the sectional interests of employees, and the extent to which they are bound by confidentiality.

That being said, there are potential benefits to a strengthened employee voice in the boardroom. Currently the majority of information that outside directors receive on the inner workings of a company come from executives; employee representatives could provide an alternative view, enhancing non-executive directors’ ability to challenge company insiders. As a significant stakeholder in the company, the employee’s perspective and insights would likely be of value in making board decisions, and could help the long-term interests of the company. Other studies have found that employee representation can lead to reduced striking, and an improved ability to weather economic crises; moreover, the practice has been positively received by boards.

Employee directors could even be instrumental in addressing that problem with which government and shareholders alike are continually grappling – excessive executive pay. While annual binding shareholder votes on pay are likely to be introduced in the UK and France, they may not be the silver bullet that some hope for; certainly the experience in Switzerland, where salaries remain among the highest in Europe, would show that such provisions may not herald the shift that some desire. With shareholders reticent to utilise their powers in light of the potential consequences of a failed binding vote, increasing employee influence over pay through a presence in the boardroom could prompt a culture shift towards more equitable structures and quantum levels.

Ultimately, much will depend on the specifics of the proposals brought forward by the government and how they might be applied. Fully-fledged employee directors? This seems unlikely in light of May’s recent comments, and critics point to the likes of Volkswagen as a dystopian example of what can go wrong under that structure. Directors nominated by employees who cannot be drawn from the employee pool or trade unions, as in the Netherlands? Employee advisory panels, who consult and make a public statement in the annual report? Whatever form it takes, any proposal will need to incorporate that hallmark feature of British corporate governance: flexibility.