Employee voice at board level: Responses to the revised UK Corporate Governance Code and the prospects for workplace democracy

Abstract

This article presents empirical findings on listed company responses to provisions on board-level workforce engagement in the revised 2018 UK Corporate Governance Code, based on analysis of FTSE 350 company reports, survey data from 70 firms, and a series of 41 interviews with directors, senior managers and workforce representatives across 17 case study firms. The findings suggest that, despite some pockets of good practice, the current code-based regulatory framework is weak and ineffective. In light of this, the article considers current debates around strengthening worker voice in governance structures – including through appeals to corporate purpose, investor engagement, and wider changes in the legal and regulatory architecture. It concludes that any fundamental reform would require a recasting of the narrative around corporate purpose, based on a pluralist recognition of the dual nature of labour/capital investments in the firm and a renewed emphasis on the principle of workplace democracy.

Introduction

In much of continental Europe, workers have the right to be represented on company boards. Significantly, these rights apply in countries like Sweden that have a unitary board system, as in the UK, as well as in countries like Germany that have a two-tier board system (i.e. with an executive management board and a supervisory board which is almost entirely non-executive). In broad terms, worker directors and works councils form a significant foundation of ‘industrial citizenship’ across Europe (De Spiegelaere et al., 2022; TUC, 2016). Whilst evidence on the effectiveness of board-level employee representation (BLER) is mixed, and it may potentially slow decision-making and limit radical innovation, a series of pragmatic benefits has also been recognised. These include increasing management–employee trust, enhancing directors’ insight, fostering longer-term management horizons, and improving the quality of decisions (Gold, 2011; Waddington and Conchon, 2016). Given that workers have in-depth knowledge of their company and their jobs, they are well-placed to contribute to strategic and operational decisions. Moreover, they are likely to have a longer-term commitment to the firm than other stakeholders, including shareholders, and there is extensive evidence that employee participation during restructuring can operate as a ‘beneficial constraint’ on senior managers, promoting productivity and profitability rather than short-term cost-cutting and shedding labour (Johnston and Njoya, 2014).

There is now widespread and mainstream political support for BLER in the UK. All the major parties have made manifesto commitments in different forms (Labour went the furthest in 2019, arguing workers in large firms should have a third of board seats). The Institute of Chartered Accountants has concluded that employee directors support long-term thinking, improve board behaviour, and enhance board credibility (ICAEW, 2018). In the final report of its Commission on Economic Justice, the Institute for Public Policy Research (IPPR, 2018) proposed that large companies adopt worker directors on both their main board and the remuneration committee, as something likely to enhance the quality of strategic decision-making and increase diversity of opinion. The TUC has long argued for BLER, suggesting that companies should have a minimum of two worker directors, elected by the workforce, with candidates nominated by unions where present (TUC, 2018; Williamson, 2018).

Until recently, the most important discussion of BLER in the UK focused around the Committee of Inquiry on Industrial Democracy (the Bullock Committee) set up by the Labour government in 1975. Following its report in 1977, the government proposed that companies should negotiate the details of BLER with unions, with statutory fall-back arrangements applying in cases of failure to agree. As Gold and Waddington (2019) document, the Conservative government elected in 1979 abolished worker director schemes at British Steel and the Post Office, and subsequent experience with BLER in the UK has been meagre, with just a handful of examples. So it was a significant intervention when Theresa May, during a speech in Birmingham in July 2016, as part of her successful Conservative Party leadership bid, promised: ‘If I’m prime minister . . . we’re going to have not just consumers represented on company boards, but employees as well’. This bold statement of intent built upon a large and growing body of interest in making business more accountable to a wider range of stakeholders, against a backdrop of fundamental changes in political economy.

In the 40 years since the debates of the 1970s, an increasingly loosely-regulated, finance-led form of capitalism has developed in the UK, wherein corporate earnings are redirected to shareholders in the form of increased dividends and share buybacks, rather than reinvested in the productive capacity of the firm or in raising real wages (Clark, 2016; Horn, 2017). These trends have also developed further, rather than receded, since the 2008 financial crisis. In 2018, overall total shareholder pay-outs among the 100 largest UK domiciled companies stood at just over 100% of net profits, compared with 43% in 2011. Moreover, comparing corporate behaviour in the first and second halves of the decade following the financial crisis reveals a measurable increase in total shareholder pay-outs relative to pre-tax profits (Common Wealth, 2020). Financialisation also drives corporate-level practices, wherein capital markets and the threat of takeover constrain the strategic choices of firms, with negative impacts on ‘mutual gains’ and high-performance productivity bargains (Cushen and Thompson, 2016; Deakin et al., 2002).

So, while shareholders can play a role in socialising corporations, the trend over recent decades has been towards a more extractive form of finance, actively stimulated by successive governments, insofar as financialisation depends upon marketisation, i.e. the creation of ‘regulatory preconditions’ for markets to arise and develop (Callaghan, 2015). Alongside the globalisation and deregulation of financial markets, and the encouragement of an autonomous role for financial intermediaries and asset managers, the core principles of UK corporate governance – takeover regulations, stewardship codes and directors’ fiduciary duties – are also strongly oriented towards a norm of shareholder primacy (Armour et al., 2003; Rees and Gold, 2020). As Deakin (2018) notes, these rules are justified as making it easier for shareholders to hold managers to account (as per agency theory), yet their effect has been to tilt the balance of power away from workers and managers, and towards the holders of the capital interest (Talbot, 2020).

All of this confirms an increasing capital/labour imbalance at the heart of the corporation. In light of these concerns, the article documents corporate responses to the latest government measures aimed at addressing employee voice in governance structures. The findings indicate that the current soft law, code-based regulatory regime is weak and ineffective. We therefore consider other avenues for reform, in particular the currently popular arguments for positive investor engagement and for the promotion of corporate purpose. We offer a critical analysis of these trends and suggest that wider changes in the legal and regulatory architecture may be necessary to embed worker voice at board level. This agenda would require a recasting of the narrative around corporate purpose, to one which recognises the dual nature of labour/capital investments in the firm, and hence a renewed focus on the principle of workplace democracy, largely dormant in governance debates since the 1970s.

The starting point for such a pluralist position is to recognise, contrary to widely held ‘common sense’, that shareholders do not own corporations, or even the assets of corporations. Shareholders only own shares of stock (bundles of intangible rights, most particularly the rights to receive dividends and to vote on limited issues) (Ireland, 1999). However, economic coordination rights in the corporation are currently assigned exclusively to capital via property, and labour is effectively excluded from the government of the company (Ferreras, 2017). There are in fact two classes of investors constituting the firm. One is capital. The other is labour. Their investments are mutually dependent: without one or the other, the firm would cease to function. The firm is thus a social institution with two key constituents who, crucially, share overlapping economic and political claims (Common Wealth, 2020; Ferreras, 2023). The firm’s rights ensuing from the investment of capital, land, infrastructure, etc. also ‘entail obligation and responsibility to participate equally with workers (investing labour, knowledge, sociality, emotion) in communities capable of both political disputation and solidarity’ (Casey, 2014: 476).

This emphasis on a pluralist framing of capital/labour investments in the firm implies a particular interpretation of corporate purpose, wherein the firm is no longer conceived as merely a vehicle for value extraction and the maximisation of shareholder value but, instead, as a self-governing institution with mutually dependent parts, more akin to the status of a civic body. This in turn suggests the need to develop institutions to balance interests within the firm. Crucially, institutionalising pluralism as praxis requires state regulation and public policy goals (Dobbins et al., 2021), implying a shift away from the prevailing principles of deregulation and voluntarism in UK corporate governance and towards a more interventionist company law framework.

The article is structured as follows. After an outline of the Methods, the Findings section provides a summary of corporate responses to the revised Corporate Governance Code provisions on workforce engagement – why particular options were chosen, how they work in practice, and how firms have reported against them. The Discussion and Conclusions section considers the effectiveness of the current soft law Code as well as contemporary debates around investor engagement and corporate purpose, before commenting briefly on the feasibility of a pluralist conception of employee voice in corporate governance within the UK context.

Methods

Subsequent to Theresa May’s 2016 speech, a Green Paper consultation and a Select Committee enquiry, in August 2017 the government invited the Financial Reporting Council (FRC) to revise the Corporate Governance Code to include a new requirement for companies to adopt, on the Code’s ‘comply or explain’ basis. Specifically, Provision 5 states:

For engagement with the workforce, one or a combination of the following methods should be used:

• a director appointed from the workforce;

• a formal workforce advisory panel;

• a designated non-executive director.

If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers that they are effective.

The Code applied to accounting periods beginning on or after 1 January 2019, and 2020 therefore saw the first full year of annual reports under the new rules. The article presents data from a Financial Reporting Council funded project (Rees and Briône, 2021), which used a combination of qualitative and quantitative methods, progressing through three stages of enquiry.

At stage A, we extracted information from annual reports to establish the choices firms had made, the stated rationale, and any details on activities and outcomes over the previous 12 months. All FTSE 350 company reports were accessed, during August and September 2020. After discounting investment trusts and a handful of firms with fewer than 50 employees, a total of 280 companies remained, and these formed the basis of our analysis.

At stage B, a questionnaire was developed to further illuminate firms’ workforce engagement arrangements beyond what could be gleaned from reports. We asked mostly closed-ended questions to enable coding and tabulation, for example concerning topics covered in board-level discussions (from a list of options), who is responsible for leading these discussions, and how often issues arising from the workforce engagement mechanism are raised. The survey was hosted digitally, with an email invitation sent to all FTSE 350 firms, targeting the company secretary or a senior HR contact. Responses were received during September and October 2020. In total 70 firms participated and answered at least half the questions, a response rate of 20%.

At stage C, we engaged directly with key individuals to gain more detailed information about how workforce engagement has operated in practice. We conducted interviews at 17 firms over a five-month period from October 2020 to February 2021. The 17 cases come from a range of sectors including insurance, mining, IT services, beverages, hotels and entertainment, passenger transportation, multiline utilities, water utilities, healthcare equipment and food retailing. They cover a range of sizes in terms of number of employees (six have fewer than 10,000 employees, nine have between 10,000 and 100,000, and two have over 400,000). They also include examples of all of the major responses to the Code (five have solely designated non-executive directors [NEDs], five have advisory panels, five have alternative or existing approaches, and two have worker directors).

In total 41 interviews were conducted (using online video conferencing software), principally with company secretaries, senior HR directors, non-executive and other directors, employee directors and other employees involved in staff forums. Interviews followed a semi-structured format to allow a flexible exploration of each firm’s experiences while still covering common issues across all the cases.

Findings

Of the 280 reports we examined, 89 firms (32%) reported they had not adopted any of the three mechanisms in the revised Code as a direct consequence of the Code. Instead, these firms outlined alternative or existing arrangements they felt met the Code requirements. The remaining 191 firms responded by newly adopting one, or a combination, of the three options. The largest proportion, 112 firms (40%), chose to appoint one or more designated NEDs, 33 firms (12%) established an advisory panel (in some cases by expanding an existing staff forum), and 45 firms (16%) designated NEDs in combination with setting up an advisory panel. Only one firm newly appointed worker directors following the Code revision. Our survey revealed a similar picture, with the majority of firms saying they had appointed a designated NED.

Non-executive directors

By far the most common response to the new provision has been to appoint a designated NED (or, in a few cases, multiple NEDs covering different regions or sectors). Reasons for choosing this option were often absent or vague in annual reports, beyond stating that it was the ‘most appropriate mechanism’. The rationale for appointing particular individuals to the role was also unclear in most cases. Nearly half of survey respondents said their chosen NED has ‘no previous experience of working in workforce engagement’. Even where they did, this was rarely in an HR function and never as a former trade unionist or workforce representative. Most of the claimed relevant experience was as a CEO or senior executive. One typical survey response was:

The NED . . . designated as being responsible for workforce engagement (our current chairman) . . . already had active lines of dialogue with the workforce, and regularly travelled to company offices and plants both in the UK and overseas. It was therefore thought appropriate that he should take on this additional role, given his existing engagement with the business.

In company reports, the function of the NED was often described as a channel or messenger of some kind – to ‘act as a conduit between employees and the board’, or ‘understand employee views and present them to the board’, so these can be ‘considered as part of the board’s decision-making’. Another common function was to ‘complement the engagement survey’, perhaps presenting the results to the board. In some firms where established trade unions or other collective voice structures already existed, NEDs were sometimes described as meeting with them and reporting back to the board, though this was not universal; indeed some annual reports described parallel activities where designated NEDs operated without interacting with existing HR and employee representation structures at all.

Examples of NED activities mentioned in reports are varied, and include: site visits and plant tours, town hall meetings, chairing the responsible business committee, lunches and ‘roundtable sessions’, receiving updates from HR directors, holding focus groups, participating in ‘panel discussions’, and attending summer parties. Many annual reports, however, offer only general statements such that the designated NED ‘talks to employees’, without further elaboration as to how, when or what about. There is also little detail on substantive outcomes or changes in policy arising from NED input and activity. When pressed for examples, a number of interview respondents suggested the value of the NED lay more in confirming that the firm’s ‘values’ and ‘purpose’ were aligned and that workforce ‘sentiment’ could be gauged. One typical comment was:

Where the NED can be useful is checking the ‘say-do ratio’ . . . We talk a lot about values, inclusion, high-performance culture, and what I want to see from [the NED] is whether we are actually delivering on that or not.

As well as the extent of dialogue with the workforce appearing to be limited, there is also a degree of confusion about the relationship between NEDs and senior HR executives. Over 70% of firms with designated NEDs in our survey describe other individuals, often HR directors or the CEO, taking the lead on presenting workforce issues to the board, leaving the purpose of the NED rather unclear. In some cases, annual reports include a ‘corporate governance’ section describing how a designated NED for workforce engagement has been appointed to meet the Code requirements, followed by a ‘stakeholder engagement’ section that discusses workforce engagement without any mention of said NED. It is hard to avoid the suspicion that some NEDs have been given a purely nominal role for the sole purpose of making the firm appear compliant with the Code.

In summary, the role of designated NEDs is often limited. Many firms continue to rely heavily on an annual employee engagement survey, often overseen by the HR director or senior HR manager, with limited or even no NED involvement. NEDs are appointed in most cases to complement rather than replace or develop existing mechanisms and they rely heavily on site visits and an annual staff survey to carry out their role. Annual reports provide few details of how NEDs bring two-way dialogue to the boardroom and there is little evidence of NED activities having concrete impacts on board decision-making. It should be noted, however, that many firms stated that ‘further reporting’ will occur next year, or that the role is ‘to be developed’, with some saying that ‘the frequency of NED meetings will increase’.

Advisory panels

Of the 280 firms in our sample, 78 report setting up some form of advisory panel, with over half of these also appointing one or more designated NEDs. In addition, many of the firms we placed in the ‘alternative arrangements’ category also have some form of staff forum, works council or other consultative body with employee representatives, often as part of a more complex set of arrangements. The ‘advisory panel’ is therefore an inherently ambiguous category to define and measure, a problem exacerbated by the wide variety of terms firms use for these bodies – staff council, people forum, board engagement guild, employee voice group, colleague contribution panel, etc.

Some of these bodies were a continuation or evolution of structures pre-dating the revised Code, though this was not always clear in annual reports, which made it challenging to determine the influence of the Code. Around one in ten firms indicated that the Code had encouraged an existing forum to be formalised into a workforce advisory panel. For example, one firm refers to having ‘expanded the existing infrastructure to create a more formal governance framework’, while another reports that ‘workforce forums already in place provided a strong basis on which to develop and grow a group-wide engagement structure’.

The justification for the advisory panel was frequently described as enabling the board to gather a broad, representative or collective view of workforce opinion. A typical comment was: ‘We chose this as our preferred approach as we believe that a collective voice enables the widest range of views to be heard from across the workforce’. Panels are commonly reported as functioning to ‘collate employee views and feed them back to the board’. They were usually described as meeting at least twice a year and reporting each time to the board, which was actively involved in shaping the panel remit and approach. Over half of firms with panels had adopted a hybrid model, combining the panel with one or more designated NEDs, who were often referred to as a ‘conduit for dialogue’ between employees and the board, via the panel. Often the NED will chair or otherwise attend the panel and provide a formal report to the board. Firms without designated NEDs tended to use an HR director or even the CEO to fulfil this conduit function. Firms were reluctant to give this role to workforce panel representatives.

As with NEDs, the agenda of advisory panels is often heavily shaped by the annual engagement survey, though there is also scope for discussion of a wider range of issues. Commonly reported topics include: results of the employee survey, flexible working, mental health and wellbeing, workplace facilities and environment, culture and values, diversity and inclusion, career development, COVID-19 response, climate change and sustainability. Some panels allowed considerable scope for employees to set the agenda of meetings, while in others the board maintains close control, and here panels often serve to communicate and explain decisions already taken.

As discussed above in relation to NEDs, it was hard to find clear-cut examples of where the views of panels have directly changed board-level decisions or recommendations, though there was some evidence of issues brought to the board’s attention by panels leading them to task functional heads with identifying action plans for future monitoring. Some firms also discussed their plans to further strengthen their panels over the coming year and to establish a more robust ‘feedback and reporting loop’.

The composition of panels takes different forms. A majority appear to consist mostly of workers nominated and/or chosen by senior managers to be broadly representative of different sectors or demographics. Some consist only of the designated NED sitting with other members of the ‘leadership team’, though this was rare. A significant minority of panels, however, were largely nominated or elected by the workforce, who might in turn elect their chair (or co-chair alongside a NED or other board member). One firm reported that ‘employees from a range of different departments and locations were democratically elected by their peers to serve a two-year term on the forum’. Some larger companies had more complex multi-level structures such as tiers of local, regional and national panels, each choosing delegates to send to the next level.

In summary, while some arrangements are fairly limited, most advisory panels do allow for some meaningful discussion of strategic issues, something not possible from merely a staff survey, site visit or town hall meeting. They allow the board to liaise with a group that is more representative than focus groups or surveys alone. They tend also to be more formalised – with regular meetings, minutes and action points – than the rather ad hoc activities of the majority of designated NEDs.

Alternative arrangements

Around one-third of the 280 firms we examined at stage A chose to ‘explain what alternative arrangements are in place and why it considers that they are effective’. This covers a wide variety of approaches. Some are longstanding arrangements, including close partnership working with trade unions or regular engagement through other pre-existing consultation structures. At least eight firms had existing forums that had changed little in response to the Code and are similar to the advisory panels discussed above. To quote one example:

Across the business, around 70% of employees are represented by works councils, trade unions or other bodies and agreements. The business engages with these bodies . . . and the board is apprised of key developments and considerations . . . The board intends to further develop its employee engagement programme to ensure coordinated representation of the global workforce.

One of our case study firms has strongly integrated their trade unions into board-level workforce engagement, while preserving the union’s distinct collective bargaining role. In a highly unionised workforce, there is a company-wide forum together with a series of workplace forums, both including seats for trade union representatives. The forums have union and management co-chairs who jointly set the agenda. Significantly, these arrangements are formalised in a written partnership agreement between the firm and the three recognised unions. All board members attend forum meetings, on a rotating basis, giving frontline union representatives direct access to the board and senior executives. The management side joint-chair of the forum commented:

[The firm has] always been big on partnership working . . . We have a really collaborative relationship – I respect the views of the unions, and they respect my view . . . The trade unions . . . really want the company to be a success . . . [There are] many long-standing staff here who are very loyal to the company . . . something the management are very conscious of.

Other firms in the ‘alternative arrangements’ category have, in marked contrast, taken a much more cursory approach, simply declaring their existing practices, however limited, to be in compliance with the Code, while changing nothing about how they operate in practice. In some of these cases the pre-existing arrangements are limited to a basic annual engagement survey, perhaps supplemented with occasional site visits. Many of these approaches could be described as scattergun or piecemeal, adding together a range of often informal activities (such as site visits, focus groups and town halls) and claiming these add up to a coherent strategy for workforce engagement. Short boilerplate statements are common in annual reports for this group, along the lines of ‘We carry out meaningful, regular dialogue with the workforce’, without elaborating on the structure, nature, quality or depth of that dialogue.

When justifying their non-adoption of the three recommended approaches, a number of firms reference their size, with ‘too big’ and ‘too small’ both used to explain why these mechanisms would not suit them. Small firms often explained that informal forms of communication were sufficient, with many workers already having direct access to board members. Large firms tended to reference complexity or multinational operations as impediments. For example, one firm’s annual report states:

With 558,000 employees, located in around 90 countries and services often delivered by a significant number of our employees embedded directly with our customers, ensuring meaningful two-way engagement with the Group’s employees is difficult to achieve by using the methods set out in Provision 5 of the Code or a combination of these.

Some larger firms felt that ‘no single method is suitable for the entire workforce’, so used a range of different mechanisms in different countries or sectors, varying in formality, some involving trade unions, with perhaps a European Works Council for their EU operations and staff forums in some countries but not others.

In summary, the category of ‘alternative arrangements’ contains many of what might be fairly characterised as the weaker responses to the Code, but also a number of more robust, bespoke arrangements. Choosing not to make changes in response to the revised Code can reflect existing arrangements working well – particularly in the case of some larger firms with well-established formal mechanisms involving European Works Councils, staff forums and various other trade union channels. In other cases, however, it can reflect an attitude of complacency, where firms have few if any formal arrangements in place but have chosen the path of least resistance in declaring themselves to be compliant nonetheless.

Worker directors

Two firms with worker directors were included in stages B and C of the project (three more were identified from annual reports). In one of these firms, two worker directors were appointed by senior management, with a remit to bring their own singular perspectives, as individual employees, to the board. In the other, worker directors are elected by their colleagues, with the group employee director collating and representing the view of the wider workforce at board meetings. This latter firm has had employee directors on its main board since it was first established several decades ago. It combines a group employee director on its group-wide board with 14 employee directors sitting on local operating company boards (all elected by the workforce in their areas for a three-year term). The group employee director explained:

I do a board report for our board, built up of what each of those employee directors are specifically talking about in their areas, and I pick out the highlights, and build that into one single report, so I can give a sense of [the business] across the UK . . . and that is for noting or discussion.

This firm provides another example of close alignment between board-level and trade union representative structures, with the group employee director describing collaboration between local employee directors and union safety and learning reps. The HR director confirmed the importance of maintaining trust and complementary roles:

We have quite a clear delineation between the collective bargaining arrangements, which are absolutely the preserve of the trade unions, negotiating pay etc. . . . but the broader concept of employee representation in the boardroom is through the employee director . . . The employee directors make a particular point of building constructive and open relationships with their local trade union reps, and they treat each other with mutual respect. The unions understand that the employee director is not there to usurp or supplant their responsibilities for collective bargaining . . . They respect each other’s boundaries quite well.

The HR director further expanded on the benefits that the employee directors bring to the firm:

The vast majority of our employees are frontline staff . . . and . . . the employee directors who are elected tend to come from those populations . . . and if there are practical issues that frontline workers have got ideas or suggestions about, that allows those EDs to put those ideas forward in their local boardrooms.

This approach contrasts with the other firm we studied, which has not positioned its two worker directors to have this broader representative role. Rather, as the HR director commented,

These people weren’t elected, they were selected . . . and they don’t have a mandate to be engaging the 60,000 employees in our workforce, or indeed to be a conduit for those 60,000 people.

Here, the two worker directors were appointed for a three-year term, following a lengthy selection process. Despite stating ‘I am not the voice of the employees, I am the voice of an employee’, one of the two employee directors insisted that she can still reflect wider workforce concerns: ‘Although [the other WD] and I often have anecdotal examples, I don’t think it’s uncommon for those to be indicative of a broader sentiment or issue, so we can add some depth and colour to conversations about things happening within the organisation’.

These two firms aside, the vast majority have clearly been reluctant to appoint worker directors. We asked firms with other approaches whether they had considered this option. One typical response was:

We felt there were potentially some practical problems with that, in terms of director responsibility, and how you get someone from the workforce to do that role without them having the experience and technical background that directors need to have . . . You have to be careful in assuming that one worker director is necessarily going to be the democratic voice of the whole workforce.

Other respondents worried that worker directors might become ‘captured’ by the board, leading to distrust from the wider workforce. A counterpoint was offered by the HR director from the firm with longstanding worker directors who, when asked why she thought other firms were reluctant to follow its example, said:

I assume one reason may be fear and perceived loss of control, perhaps concern that someone will ask an awkward question that will put them on the back foot, or expose something that should have been done differently, or constrain how they run the business . . . Another reason companies might be reluctant is that they think it’s a lot of work, and it is. You do have to make sure that the people who get elected are . . . properly trained and supported to carry out the role in the professional way you want them to.

In summary, worker directors provided effective, if different, approaches to workforce engagement in the two firms we studied. They were active in board discussions across all issues and had little difficulty fulfilling their legal obligations. There was, however, a distinction between worker directors aiming to reflect the views of the entire workforce and those merely bringing their own individual perspectives to the board.

Discussion and conclusions

Despite some evident pockets of good practice, the overall picture that emerges from this brief summary of responses to the revised Corporate Governance Code is of firms falling some way short of achieving meaningful worker voice at board level. Most firms have opted to give the workforce engagement brief to a designated NED. However, NEDs are part-time, tend to hold multiple board appointments, and may spend only one or two days a month on corporate matters. They are not elected by employees and do not receive any mandate from employees. Moreover, NEDs will usually be selected from the same professional and class background as other directors, and tend to lack high-level experience in employment relations. There has long been a prevailing one-dimensionality in the constitution of most boards and the bulk of corporate responses to the revised Code do nothing to challenge this. Moreover, in the majority of cases, and rather ironically, decisions on new approaches were made by the board without consultation with the workforce. Although impact metrics are difficult to capture, we also struggled to identify concrete examples of decisions influenced by Code-driven practices. Instead, our case study firms tended to stress rather intangible effects, centred around the opportunity for boards to gauge the ‘sentiment’ of the workforce regarding existing objectives. This suggests a process whereby employees are merely confirming board-level decisions, rather than inputting to discussions at the strategy formulation stage.

That said, we found that worker directors, while not a panacea, at least guaranteed a minimum level of direct employee voice in the boardroom in both of the cases we examined. We also found a significant number of firms with well-established and effective consultation processes, already exceeding the minimum requirements of the Code. Where the employment relations climate is one of high trust and partnership, we find well-functioning advisory panels and worker directors working effectively alongside established trade union channels.

The Financial Reporting Council has itself been critical of responses to the new provisions, stating in its first annual review of the revised Code that ‘it is not clear from this year’s reporting how much thought was given to the effectiveness of the method chosen’ (FRC, 2020: 11). It also highlights the tendency towards rather formulaic statements and vague explanations around impact and outcomes, something our findings very much echo. As Villiers (2021: 174) notes, ‘inserting provision for worker directors or representation in the boardroom into a regulatory instrument that is widely respected by the business community appears at first sight to be a radical achievement’, yet she is sceptical how far this is a positive step from a labour perspective. Indeed, our findings suggest a voluntarist and code-based system delivering a further round of rather tepid proposals, all too easily evaded via the ‘comply or explain’ principle.

In light of this picture, we can ask where this leaves the potential for strengthening employee voice in governance structures. Further revisions to the Code might insist on stronger disclosure requirements, but in isolation these are unlikely to shift firms towards robust engagement with employees at board level, with the more recalcitrant firms continuing to hide a lack of initiative in obfuscatory language. The problem here is that soft law codes remain voluntary and ambiguous, and therefore open to interpretation (Hadden et al., 2014). The exhortation to ‘comply or explain’ is not a strong motivator because non-compliance is not subjected to rigorous analysis or any meaningful repercussions (Casey, 2016). Moreover, the requirements around workforce engagement are in this respect weaker than other provisions in the Code, accepting merely an explanation of alternative arrangements and their assumed effectiveness as a form of compliance. More fundamentally, reporting per se of course does nothing to alter power imbalances within the firm or weaken the imperatives of financialised capitalism.

There is currently a growing argument that it is now precisely within the finance and investor community where the real potential lies to steward firms towards more pro-stakeholder positions, via ‘environmental, social and governance’ (ESG) funds and so-called ‘responsible investment’ (RI). While at first sight this might, following Giridharadas (2019), appear somewhat hubristic and hypocritical, given the role of the finance industry over several decades in entrenching the very form of extractive and rentier capitalism that it now claims to be able to reform, these developments also remind us of the essentially double-edged nature of the capitalist economy, wherein shareholder activity can be both a driver of ‘financialised’ corporations as well as a factor in the emergence of more ‘socialised’ forms (Ireland, 2018). There has certainly been a dramatic recent rise in institutional investors’ public commitments to ESG, and a whole industry has developed to assist companies and investment vehicles to measure ESG risk. The question remains, however, how far institutional investors actively pressure companies to broaden or deepen their workforce engagement policies and structures.

The evidence to date is far from convincing. While there is movement on the ‘E’ in ESG, with a significant amount of investor engagement around climate change and carbon emissions, it is notable that the ‘S’ – at least as regards employment and workforce issues – is far less advanced. Shareholders routinely vote down proposals aimed at making companies more transparent and accountable. Share Action (2020) found that just 15 out of 102 ESG resolutions received majority support in 2019/20. The world’s two largest fund managers, BlackRock and Vanguard, voted for just 12% and 14% of proposals respectively. Other research from PIRC (2021) reveals strong asset manager opposition to employee representation in corporate governance structures. In a more recent analysis, Johnston and Samanta (2023) likewise find little if any commitment on the part of institutional investors to push companies to establish meaningful arrangements for workforce engagement. They examined the stewardship reports of 90 asset managers and owners who are signatories to the FRC’s UK Stewardship Code. Very few of them explicitly refer to workforce engagement, and those that do provide no evidence of pressing for BLER, with most pension funds simply replicating the existing requirements of the Code:

Overall, then, it appears that most asset owners and asset managers do not engage with difficult questions about workforce engagement as part of their routine stewardship activities, simply leaving companies to comply with the UKCGC in the way they see fit. (Johnston and Samanta, 2023: 13)

This body of evidence suggests that while investor pressure is now widely promoted as the key to more progressive forms of governance, it is essentially a false hope, what the Financial Times columnist Robert Armstrong (2021) describes as a ‘displacement activity’, one that shuffles shares between investors without materially affecting behaviour. This follows an acceptable narrative for business leaders, allowing for the appearance of correcting internal and external risk factors without altering the essential power and control dynamics of the firm. Investors act from self-interest, monitoring ESG metrics only insofar as this influences portfolio returns. Many pay attention only to surface-level ESG reporting for the purpose of assessing brand attractiveness, without exploring the detail of material change in ESG practices. As Johnston and Samanta (2023) conclude, this highlights the limitations of relying on investors to drive deeper workforce engagement by investee companies. Even asset owners and managers publicly committed to an ESG approach neither include workforce engagement in their stewardship policies nor put pressure on companies to deepen it.

At the same time as the ESG movement has gathered pace, a parallel development has been the increasingly widespread appeals to firms to promote their corporate ‘purpose’ and to reference this as a guiding principle. One exemplar is a recent British Academy (2021) project, a recipient of extensive positive commentary in the business and public policy press, which exhorts companies to ‘place purpose at the heart of their annual reporting and demonstrate to their stakeholders how their ownership, governance, strategy, values, cultures, engagement, measurement, incentives, financing and resource allocation deliver it’. A purposeful business is defined as one which ‘implement[s] corporate purposes that solve the problems of people and planet through strong ownership and inspiring leadership’ (emphases added). In the report’s recommendations, the key proposal under the ‘governance’ section is that the board ‘ensures that the company’s values, culture and strategy are aligned with the implementation of its purpose’. Here, the nature of purpose is in the gift of managerial discretion, and faith is placed in inspiring leaders to define and promote a corporate purpose that is assumed will solve a myriad of complex problems. But as Johnston (2023) notes, this form of ‘aspirational purpose’ leaves many questions unanswered: Who would define the purpose? Who would enforce it? What would the sanction be? Who would change it? Most fundamentally, how would voluntarist statements of corporate purpose influence decision-making where these run counter to short-term demands for shareholder value?

Although proponents of ESG and corporate purpose would claim each of them to be new and distinctive, both can be seen as an extension of the previous ubiquitous emphasis on Corporate Social Responsibility (CSR), insofar as both essentially represent a way of marketing companies to more discerning employees, investors and customers (Lund and Pollman, 2021). Appeals to purpose frequently coalesce around rather superficial statements of ‘values’ and ‘mission’, designed to give an appearance of progressive concern for the externalities of business, but providing little detail on monitoring and enforcement. In another much-discussed example, Edmans (2020) insists that companies will prosper by doing good, especially if they define a purpose, set a roadmap which elaborates on its meaning, identify long-term targets, and report on progress in achieving them. As Johnston (2023) observes, since it is not embedded in the company’s articles or otherwise made legally binding, such aspirational purpose would not be directly enforceable; rather, any enforcement would have to come indirectly from market forces, taking us back to ESG. As our findings also confirm, noble statements of corporate purpose rarely translate into a pragmatic willingness to allow members of the firm’s workforce into the boardroom. Once again, corporate voluntarism is unlikely to embed employee interests into governance structures.

Given these realities, appeals to corporate purpose are only likely to be truly progressive if the conception of ‘purpose’ is premised not upon loose notions of values and leadership, but rather upon the true nature of the corporate form as currently constituted. To repeat, the firm is not owned by shareholders, but is, rather, a ‘political entity’, more accurately considered as ‘an institution of the commons: a social institution with multiple constituencies’ (Common Wealth, 2020: 13). As such, all of a firm’s stakeholders have the right to a voice in the governance structures that rule them. The corporation is constituted by mutually dependent interests and their representation in the governance of the firm means that the ‘common good’ of the firm can be negotiated (Hayden and Bodie, 2020). The purpose of the corporation is then recast as enabling these multiple rights to be enacted through effective governance structures.

This brings us to an argument for a shift away from the prevailing principles of deregulation and voluntarism in UK corporate governance and towards a more interventionist company law framework (Driver and Thompson, 2018). In broad terms, a coherent form of regulatory overlay might begin to rebalance capital and labour interests, premised upon a renewed recognition of pluralism in both firm governance and management (McGaughey, 2021). This might encompass a range of related measures including, for example, mandatory worker directors (elected by the workforce, not appointed by management), revisions to shareholder voting rights, a recalibration of the incentives and duties of company directors, a more robust public interest test for mergers and acquisitions, and greater transparency in executive pay (Rees and Offenbach, 2020). This parallels the case for deepening pluralism in employment relations via the extension of joint consultation and collective bargaining arrangements. Following Ackers (2020), this ‘mixed economy’ approach to strengthening employee voice also has the greatest potential to win wider political, employer and public support.

Pursuing this agenda is challenging in the UK context. As Dobbins et al. (2021) note, institutional pathways in liberal market economies (LMEs) like the UK and Ireland remain firmly oriented towards a hegemonic unitarist frame prioritising worker performativity and capital accumulation, rather than pluralist democratic rights. There is extensive evidence that BLER, for example, works best alongside complementary institutions, and German-style co-determination may not be easily imported to LMEs such as the UK. That said, our findings indicate that BLER is compatible with a unitary board structure. They are also consistent with an increasingly mainstream set of arguments concerning the potential of the ‘entrepreneurial state’, and there is a renewed political appetite for the state to transition towards a more coordinated approach (Allen et al., 2021; Mazzucato, 2018). In this, institutions matter. As Driver (2022) argues,

Workers on boards means little unless organized within a context where there is a level of trust between labour and management. That requires an institutional architecture to be constructed . . . The aim must be to approximate these institutions by incremental steps so as to lay the groundwork for countervailing power in the boardroom.

The corporation comes under pressure from the centralisation and concentration of capital, the demands of financialisation, and the relentless necessity to find new markets and sources of profit. In our study we found countless examples of committed senior managers who respect and value their staff and who implement employee engagement strategies with the best of intentions. However, a combination of soft law rules and pressure from financial markets to ‘disgorge the cash’ have led companies to prioritise dysfunctional business decisions, distributing profits in the form of dividends and share buybacks and reducing the scope for reinvestment and re-skilling (Lawrence and Rogaly, 2023; NEF, 2017). This control of businesses by capital holds down the wage share, which holds down demand, which in turn holds down revenue and growth. Essentially, labour is not sharing in the wealth it is creating, within or outside the firm (Malleson, 2023; TUC, 2022). Our analysis of company responses to the most recent round of reforms reveals many dedicated boards and management teams implementing good practice in employee engagement, but it also suggests that a more widespread and deeper democratisation of workplaces is unlikely to emerge through soft law codes, enlightened investor activism, or appeals to aspirational corporate voluntarism. Progress will more likely depend upon a recasting of corporate purpose in tandem with a determined commitment to pluralist regulation in company governance and management.