Are worker directors good for business?

Aoife Ní Lochlainn: TASC has today published a report on Worker Directors in Ireland, Good for Business? Worker Participation on Boards. This project, supported by the National Worker Director Group, aimed to examine the role and contribution of the worker director to the board and to corporate governance.

Employee participation on boards is common is many European countries. Some countries, such as Germany provide for worker directors in both the public and the private sector. In Ireland, employee participation at board level is underpinned by the Worker Participation Acts 1977 and 1988. This allowed for worker directors in a limited number of state-owned enterprises and government agencies.

The architects of this legislation had a vision of the company as a ‘social institution’. They believed that as the activities of a company had a wider social impact than that of the financial bottom line that boards should governed by the stakeholder approach rather than the shareholder approach.

In the words of the then Minister for Labour Michael O’Leary,
“Ownership of its physical assets [the company] is no longer regarded as conferring an absolute right to exercise control without taking into account other interests such as those of employees or society generally.”

Worker participation in decision-making was regarded as a right; a form of industrial democracy. It was also seen as providing other benefits to the company, including improved decision-making and a greater appreciation for the contribution of the worker.

While worker directors have been widespread in Europe for over thirty years, there is relatively little evidence on the impact that this has had on company performance and what evidence exists is equivocal. A 2011 European Trade Union Institute review of relevant studies found that the evidence was inconclusive. Ten studies found some positive effects of board level representation, while eleven studies found no significant effects, positive or negative. Seven studies found negative effects.

The TASC study seeks to examine the role and contribution of the worker director, and possible conflicts inherent in that position. A focus group comprising nine worker directors from six different companies and organisations was held. Thirteen interviews were also held in order to ascertain the opinions of non-worker director board members, company executives and independent experts. The issues discussed included the following:

• To what extent do worker directors have conflicting loyalties between their board obligations and obligations to their electorate?
• What are the implications for industrial relations?
• What is the nature of the relationship between worker directors and other board members? Is it one of mutual respect or is it characterised by distrust and conflict
• Are worker directors treated equally to other non-worker director board members? Are there any restrictions on their participation in board committees for example?
• Do worker directors make a unique contribution to corporate governance and the operations of the board, and if so is this contribution positive or negative?

Overall, it was found that worker directors were felt to be loyal, trustworthy and diligent in their duties. The contribution of worker directors to corporate governance was felt to be unique and positive by over three quarters of interviewees.

The intimate and operational knowledge of the organisation was seen as a positive contribution to the board. The role of the worker director in providing a contrary voice which could help avoid groupthink was highlighted by many interviewees.

Worker directors are generally treated as equal by their board colleagues and almost all respondents stated that they had never heard of a breach of confidentiality or conflict of interest in relation to worker directors. However, almost all worker directors interviewed felt excluded from the audit and remuneration committees, and in particular felt that CEOs would not welcome a worker director on a remuneration committee. This perception was borne out by non-worker-director interviewees, over half of whom felt that worker directors should not sit on remuneration committees due to a potential conflict of interest.

The contribution of the worker director to the area of industrial relations was seen as extremely positive, primarily as they can act as a two-way conduit for information in times of conflict.

However, it was felt by many interviewees that employees should be better educated as to the role and obligations of the worker director, to avoid any false expectations on those who are elected.

Most non-worker director interviewees felt that the model should be extended across the public sector. This was the hope of the original architects of the legislation. However, worker directors are not without their critics. In a 2003 article in the Irish Times, Niamh Brennan wrote:

“in the case of worker directors elected by staff, their central interest would in many cases be that of the employees who elected them, which would not necessarily be consistent with the legal requirement of directors owing their fiduciary duty to the company.”

A clear finding of this report is that the worker directors understood that worker directors are under the same legal obligations to the company as all other directors. Equally, the non-worker director interviewees believed that the worker directors act in the best interests of the company.

Posted in: Corporate governance • Corporate governance

Tagged with: corporategovernance • worker directors