Should workers be elected to company boards?

Revelations of wage underpayment at Woolworths has strengthened the case for employee-elected directors on the boards of Australia’s largest listed companies.

The retail giant joined a growing list of companies that failed to correctly pay staff when it announced last week an estimate of $200-$300 million in underpayments over the past decade.

Woolworths is in the firing line for as much as $300 million in underpayments.Credit: Patrick Scala

Woolworths’ admission should have other retailers scrambling to review wage payments and self-correct errors (if they haven't already), in the wake of underpayments being exposed at convenience stores, restaurants, airlines, hardware chains and now supermarkets.

Nobody knows the extent of the problem but what is clear is that boards of too many ASX-listed companies have failed to govern adequately for employees outside the executive team.

The banking and aged care royal commissions have exposed rotten cultures in organisations and cases of companies squeezing employees too far in order to boost profits.

It’s wrong, of course, to tar all boards with this brush. Many directors I know think carefully about the needs of employees, customers and the community when making board decisions. Their role extends far beyond considering only shareholders in governance decisions.

Still, it is fair to ask if wage underpayment would be as rife if at least a few employee-elected directors – who stand up for staff - were on listed-company boards.

Or if some boards would have been as blinded to organisational culture problems if employee-elected directors, who live and breathe the business, has a seat at the board table.

With employee-elected directors, a listed-company board might comprise, say, of six directors elected by shareholders and two by staff. The employee-elected ones would probably be union officials, given unions are best placed to organise staff when it comes to electing directors.

Germany and Scandinavian countries have long had some employee directors on their company 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).

The supervisory board can have between a third and a half of its directors elected by employees and the rest by shareholders. German supervisory boards range from three to 21 members.

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.

Earlier this decade, France legislated that companies with over 5000 employees worldwide, or at least 1000 in France, must have one employee representative on the board when there are up to 12 board members, and two on the board when there are 12 or more directors.

In the United States, Democratic Party presidential candidate hopeful Elizabeth Warren last year proposed large American corporations should let employees elect 40 per cent of their directors.

In Australia, the ALP, before the 2019 federal election, said it would examine measures that increase collaboration between employers and workers (including worker representation on boards) and review similar governance models overseas.

The Australian Workers’ Union, Finance Sector Union and other local unions are pushing for employee-elected directors on boards, a move that would expand their influence.

If boards must govern for employees, it makes sense to have some directors who represent staff and know the company’s inner workings.

I have always been against the model of employee-elected directors on listed-company boards and understand board reluctance to have union officials, some of whom may be militant or disruptive, sitting at the board table and shaping the company’s direction.

Moreover, directors need skills to govern across many areas. How would an employee-elected director with no executive experience govern through a capital raising or during a merger and acquisition? Could such a director coach executives on organisational strategy?

Another risk is employee-elected directors only governing through the lens of employees and being unable to balance the needs of multiple stakeholders when making decisions. Would an employee-elected director agree to a massive redundancy round to boost profits and shareholder returns?

How would an employee-elected director with no executive experience govern through a capital raising or during a merger and acquisition?Credit: Louie Douvis

The opposing view says listed-company boards are, as part of the push towards stakeholder capitalism, increasingly expected to govern beyond the needs of shareholders. If boards must govern for employees, it makes sense to have some directors who represent staff and know the company’s inner workings.

Certainly, a closer relationship between staff and the company at board level has helped some German companies become more innovative and agile.

There are mixed views on the effectiveness of the German supervisory model, but combining employee-elected and shareholder-elected directors could, in theory, help companies implement major restructures as management and staff work together to drive change.

Also, the argument that employee-elected directors cannot govern across issues is a little demeaning. Who says an employee cannot acquire governance skills with appropriate training and experience? Their background brings a different perspective to the board.

Australia’s wage underpayment scandal shows too many listed-company boards have been too far removed from employee practices and organisational culture. One wonders how part-time non-executive directors, some of whom have multiple board roles, can adequately govern organisational culture and look out for employees amid complex, multibillion-dollar global operations.

The revised UK Corporate Governance Code, which came into effect this year, seems like a sensible middle ground. It has a stronger focus on companies giving employees more voice in the boardroom through one of three options. This could include an employee-elected board member, a workforce advisory board or the designation of a non-executive director to engage with employees. Companies choose if they want to comply but need to explain why if they don't.

Let us hope (for the sake of our retirement savings) that listed-company boards respond to wage underpayment and other labour-related issues through stronger consideration of employee needs when making governance decisions. Many seem to be heading in that direction.

But is the traditional governance model up to the task of hearing an employee voice and would employee-elected directors be more help than hinderance?

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