The Financial Reporting Council (FRC) has just published research into how companies have implemented the requirements of the UK Corporate Governance Code on workforce engagement.

To recap: the 2018 code included for the first time a principle stipulating that “for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties”.

And for engagement with the workforce, the code says that one or a combination of three methods should be used: a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director.

Overall, the results make for disappointing reading. On the other hand, the report’s analysis should—if companies take notice— help to assuage concerns about worker directors, which have clearly worked well in the few instances where they are in place. And there are plenty of pointers about how to improve going forwards.

Workforce engagement still has a long way to go

Perhaps the most shocking finding is that very few companies consulted their workforce over how to implement the code’s requirements on workforce engagement. The exceptions to this were companies that already had good established mechanisms for staff dialogue and for whom it was therefore natural to use those trusted channels to discuss this development.

This depressing finding illustrates the importance of understanding the purpose and indeed the full meaning of workforce engagement—and for many companies there is clearly a long way to go.

There has also been a lack of workforce input into the selection of workforce advisory panel members and worker directors, and changing this is one of the recommendations of the report.

A designated NED is the least effective choice

We already knew that designating an existing non-executive director (NED) has been the most common approach taken by companies to comply with the code. The TUC has been critical of this approach, arguing that if the code aims to ensure that boards include a workforce perspective in decision-making, this is best done with the input of the workforce themselves through worker directors.

While the report tries—perhaps a little too hard, given its own findings—to be even-handed about the approaches, it also makes clear that in practice a designated NED is the weakest of the three options: the report says that “in broad terms, most of the weakest and least substantive practices were those relying solely on NEDs, or on underdeveloped ‘alternative arrangements'”.

It says it is unclear why particular individuals were chosen, noting that few had any relevant experience, and that many companies are “brief or vague” about the activities NEDs are undertaking, noting that it is “not uncommon” for the NED to function as a “vestigial limb”, cut off from other workforce engagement practices. It seems from this that many companies have gone down the NED route as that most aligned to the status quo and the easiest to carry out. Given this, it is not surprising that is has been the least effective in practice.

Worker directors are rare, but work well

There are now five FTSE 350 companies with worker directors, up from just one before Theresa May made her 2016 speech saying “if I’m Prime Minister, we’re going to… have not just consumers represented on company boards, but employees as well”. So still a low number but a substantial increase.

While the sample is small, it is clear that companies with worker directors have found they bring valuable insight and experience to the board. The report probes why more companies have not adopted this approach and suggests that boards may underestimate the ability of workforce representative to speak for a wider group of workers and take the interests of the wider company into account.

As it points out “where boards have been willing to trust worker directors or advisory panels with confidential information, or involve them in serious discussion of important issues, that trust has generally been repaid many times over.”

Conclusions

While the code has certainly brought about some improvements in how boards engage with their workforce, there is still a long way to go. Too few companies have trusted their workforce to speak for themselves in the boardroom. And there is too much variation, with a tendency for companies already committed to workforce engagement to take the code more seriously than those with a weak record on workforce engagement.

Unfortunately, the menu of options and the comply and explain nature of the requirement make this patchy response inevitable. Comply and explain codes can work well when there a high degree of consensus about a proposal, and a case for flexibility about how and when it is implemented. For workforce engagement, these conditions are not met.

The current state of workforce engagement within companies and the degree of consensus on its purpose and significance are too weak for a comply and explain approach with no enforcement mechanism to work effectively as a means of bringing about change. The TUC will continue to argue for a regulatory requirement that worker directors elected by the workforce should comprise one third of the board at all companies with 250 or more staff.

Ironically, a notable gap in the report (presumably reflecting its remit) is any examination of the impact of the workforce engagement strategies from the perspective of the workforce. This limits the conclusions that can be drawn about the real impact of the changes to date.

Linked to this last point, whatever form of workforce voice in corporate governance is used, this is not a substitute for collective bargaining with trade unions who directly represent their members’ interests. Worker directors are there to bring a workforce perspective to decision-making and being part of the board means that they can feed into discussions and decisions at their inception. Union representatives are there to directly represent the views and interests of the workforce in negotiations and discussions with management. The two roles complement, and do not replace, each other.

Janet Williamson is senior policy officer (rights, international, social and economics) at the Trades Union Congress (TUC).