Employee participation in corporate governance refers to a range of institutions, voluntary or legally mandated, that engage employees in corporate decision-making, such as works councils with co-decision powers on labour matters, advisory panels, information and consultation committees, employee share ownership schemes and board representation. Corporate contractarian literature dismisses employee participation as inefficient on the grounds that, if it were efficient, it would be voluntarily adopted widely. In our paper, we argue that the scarcity of employee participation in the UK can be attributed to shareholder short-termism and behavioural biases and, therefore, that the question of its efficiency remains open for companies that want to explore this possibility. We thus propose a flexible approach that companies can follow to implement employee participation. Our approach takes into account the broader UK institutional framework by creating adaptable and long-term solutions for both listed and large private companies. Nevertheless, it can be adopted in any other national context where employee board representation has not been mandated by company law provisions.

We argue that the most pragmatic way to encourage efficient employee participation is through the introduction of formal and permanent employee advisory panels and, in the longer term, the proliferation of employee share ownership schemes coupled with special rights to appoint a number of directors in tandem with the size of employee share ownership. Our approach relies on an incremental participation model, whereby employees should first be given a dialogue channel through advisory panels to gain adequate experience before appointing board members. By advancing this proposal we aim to bestow a new purpose to corporate law as enabler of greater change in governance without either disrupting shareholder-based governance or undermining labour law mechanisms to protect employees.

Employee advisory panels

We argue that it is necessary to shift corporate culture vis-à-vis labour participation and to foster a constructive dialogue between corporate management and employees as well as a more long-term stance by institutional investors which would view the workforce as a valuable corporate governance partner rather than as an adversary. Employee advisory panels should be introduced in a flexible manner: companies are free to opt for their own elections processes under the condition that a system of direct employee vote is put in place. Advisory panels would need to be given a clear and continuous operational mandate based on each company’s profile, size and activities.

Such panels, which have been also recommended by the UK Corporate Governance Code and mentioned by the Wates Corporate Governance Principles for Large Private Companies, have the potential to improve corporate decision-making through the inclusion of the employee perspective, and to enable employees and their representatives to develop the necessary skills to act as effective governance players. Panels should be conceived and introduced as ‘preparatory labs’ for the inculcation of leadership skills by employees that will be called upon to assume decision-making roles within companies in the future.

An additional advantage of such panels derives from the fact that they allow for an indirect replication of the benefits of the dual board system, mandatory in Germany and other European countries, which is absent from the UK framework. We argue that the proliferation of employee input into decision-making processes is hampered by the presence of a unitary board structure. Indeed, the dual board system englobes the presence of employees more naturally since the supervisory board offers a distinctive opportunity for holistic and inclusive oversight of the company’s management. In the unitary board structure, such features are absent and the forced inclusion of employees by interventionist norms may prove to be counterproductive. Advisory panels can replicate in some respects, in a limited but non-negligible fashion, the advantages of supervisory boards by engaging with the board of directors and by raising its awareness of issues related to the workforce and to stakeholders. The educational benefits will thus be shared amongst the board of directors and the advisory panel in the long run, preparing for the crystallisation of such benefits via the second phase of our proposals that relates to the appointment of employee representatives to the board.

Employee board representation based on employee share ownership schemes

As employee share ownership schemes are an existing element of the UK framework, and in view of the benefits of combining governance rights with residual risk, we argue that an effective model would be based on granting the right to appoint a number of directors to employees once the employees of a company collectively cross certain thresholds of share ownership. The purpose of the special appointment rights would be to provide for employee board representation in tandem with the extent in which they share the company’s residual risk.

This would allow a different culture to develop and would enable employees to build capacity as governance actors and expand their financial stakes in the companies they work for. It is also envisaged that trade unions would include demands for employees to be given the opportunity to be paid part of their remuneration in shares on favourable terms within their future collective bargaining strategies. Employee share ownership could be further facilitated by the government by expanding the relevant tax advantages. For instance, the monetary limits that apply for share grants to be exempt from relevant taxes could be increased. The public interest justifying the extension of the advantageous treatment of employee share ownership schemes by tax law consists of the long-term economic benefits to corporate stakeholders and society as a whole arising from improved corporate efficiency and the particular benefits accruing to employees.

The percentage of directors to be appointed by the employee shareholders would reflect the size of their combined equity stake, but in a regressive manner and up to a maximum of a third of the board, as the more shares employees collectively have, the bigger the practical effect of their normal voting rights.

A new paradigm for shareholder based governance?

Our proposal on employee advisory panels and gradual transition towards employee representation on boards overcomes the conceptual friction between shareholder and hybrid governance since it enables employees to gradually become part of the shareholder governance model. Interventionist approaches, such as mandatory employee board representation, may be more useful to increase regulatory visibility and the utility of legal reforms for public consumption purposes, as they will be successful in conveying the message that balance amongst shareholders and employees is being achieved and income inequality is being addressed. Nevertheless, a long-term recalibration of corporate governance structures and corporate culture can only be realistically achieved by flexible and adaptable solutions that focus on the long-term economic efficiency of the reforms and not on short-term political gains deriving from drastic legal changes.

Our approach fosters long-term value creation by facilitating closer engagement of companies with employees and investors and the inculcation of a culture of trust between capital, labour, and management. This new paradigm aims to accord a new raison d’être to shareholder-based governance with wider ramifications for the re-conceptualisation of corporate law as a hybrid governance mechanism enabling long-term engagement of investors, employees and other stakeholders.

Konstantinos Sergakis is Professor of Capital Markets Law and Corporate Governance at the University of Glasgow.

Andreas Kokkinis is Associate Professor of Corporate Law and Financial Regulation at the University of Warwick.