The requirement to adopt one of three options for workforce engagement specified in Provision 5 of the 2018 UK Corporate Governance Code (‘UKCGC’) is an important development in terms of integrating stakeholder interests into board decision-making, resulting in better stakeholder engagement. Unlike much of the history of the Code, in which the soft law provisions of the Code have generally run ahead of hard law, there is a clear link between the workforce engagement provision and the stakeholder focus on non-financial reporting, which has been implemented through hard law, albeit with selective adoption of the ‘comply or explain’ technique that was pioneered by the UKCGC.
We view Provision 5 of the Code as a key stage in the evolution of the UKCGC in terms of integrating stakeholder interests into board decision-making. First, at a high-level, the key statutory provision providing for integration of stakeholder interests (s 172 CA 2006) is focused on outcome as it specifies that the board should consider the relevant stakeholder interests. But this provision provides no process for engagement with stakeholders nor integration of their interests. In that sense, the outcome can be compared to that of the archetypal ‘black box’: we trust it to produce the right outcome, but we cannot verify how it has been reached. The move to Provision 5 indicates that the ‘black box’ model of board-decision making is no longer fit for purpose as it is replaced by a more explicit process for the integration of a (limited set) of stakeholder interests, focused on a more precise form of control. While this approach is not entirely new—one could view the introduction and evolution over time of independent directors and board committees as representing a similar trend for the representation of shareholder interests—it is a first in the UK in connection with the integration of stakeholder interests.
Secondly, the shift towards specifying process also represents a move away from the reliance on disclosure as the primary regulatory technique that has been evident in the development of stakeholder interests through non-financial reporting. That shift can be rationalised on the basis that, while disclosure can inform stakeholders, it does not provide an engagement opportunity with corporate decision-making. In that sense, Provision 5 fills a clear gap, especially for one set of stakeholders (workers). Whether it represents the start of a broader shift towards specifying a process for stakeholder engagement remains to be seen, but it seems at least plausible to posit that Provision 5 will provide a test case as to whether process may eventually trump reliance on disclosure as the primary regulatory technique or at least operate in tandem.
The aim of our research is to evaluate the early stages of the implementation of Provision 5, 2018 UKCGC by FTSE 100 companies in 2019, the first year that the UKCGC has been in force. This analysis is conducted in the context of the ‘Outcome vs Control’ and ‘Process vs Disclosure’ themes outlined above. We present empirical evidence on the options selected by companies, the rationale for adoption, overlap with pre-existing techniques and the role of the ‘comply or explain’ approach in facilitating the development of alternative models. We also consider the quality of disclosure, linked to Provision 5, and the manner in which disclosure and process work together to produce real impact on board decision-making in the context of workers’ interests.
The full paper with all our results and conclusions can be found here and this piece is forthcoming in ‘Corporate Governance, Sustainability and Reputation’, II International Conference of Corporate Governance proceedings, to be published by Thomson Reuters Aranzadi.
Katarzyna Chalaczkiewicz-Ladna is Lecturer in Commercial Law at the University of Glasgow.
Irene-Marie Esser is Professor of Corporate Law and Governance at the University of Glasgow and Extraordinary Professor at Stellenbosch University.