Employee Shareholding and Participation in Corporate Governance
(5 years, 6 months ago)
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Lord Haskel
To ask Her Majesty’s Government what assessment they have made of proposals for greater employee shareholding and participation in corporate governance.
Lord Haskel (Lab)
My Lords, this is a topic on which there is a surprising amount of agreement. It is because of the increasing erosion of public confidence in business that all the recent party conferences discussed it. They debated how to reshape business and shake up the way it works. It was caused by worries about the energy companies ripping off their loyal customers, and drew approval at both the Labour and Conservative party conferences. Disgust at the bonus paid to the chief executive of a housebuilding firm in York, which would pay to house all the homeless there, also drew cheers at both party conferences. This puts intervention by government on to the political agenda.
So what is to be done? There seems to be a degree of unanimity. Both parties agree on the need for greater boardroom diversity, with employees being an essential part of that diversity. Employee shareholding has been Labour and Liberal Democrat policy for some time, and only the other day a past deputy chairman of the Conservative Party suggested that there should be tax incentives for those who share profits and equity with staff. It is right that there should be agreement on this. Recent research concluded that we all benefit: employees benefit through a better sense of fairness, motivation and well-being, companies from unlocking exceptional levels of discretionary effort, and society benefits too. Research also shows that companies which have 3% or more of their share capital held for the benefit of employees regularly outperform other companies. So it is not difficult to draw the conclusion that employee shareholding and involvement in corporate governance is a characteristic of the successful, well-run business.
This is not new: 40 years ago, I introduced these principles in the business I was building, and I was not the exception. Governments have introduced it—our postman got shares when Royal Mail was privatised. However, the Enterprise Act 2013, designed to encourage employee shareholding, has had hardly any firms adopting its provisions. I think that this is because a sense of ownership is not enough. There also has to be a share of power, some say in policy. All this comes together in what many refer to as stakeholder capitalism, or business with a purpose—a shared sense of purpose not only within the business, but with society, customers, suppliers and all who are affected by the business, large or small.
I am grateful to the Financial Reporting Council for sending me its updated corporate governance code, because it too recommends engagement through directors appointed from the workforce and places particular emphasis on the relationship with a wider range of stakeholders. The Companies Act already calls on companies to behave in this way. There are new regulations that will require companies to report on salary ratios, engagement with employees and better corporate governance.
Fortunately, there are some schemes designed to help this work—to help workers be responsible shareholders and directors, in trying not only to raise productivity, but to make their places of work more purposeful. One of these is Be the Business, chaired by Charlie Mayfield. I declare that I am a member of it. Be the Business provides tutoring and mentoring by experienced executives from many of our successful companies—interventions that are already giving firms a boost, particularly SMEs. Be the Business also creates business improvement networks that enable best practice to be shared between firms that would otherwise not be exposed to more efficient ways of working.
The Government’s industrial strategy—noble Lords might remember that—if it is ever put into practice would target solutions aimed at raising productivity, but employee shareholding and participation in corporate governance hardly feature. Of course, worker directors and shareholders have every incentive to raise productivity because this is the key to higher wages, but the tutoring, mentoring and sharing of best practice could have been a very helpful recommendation made to the Government by the promised industrial strategy council, which has yet to meet.
With increasing knowledge and understanding, maybe worker shareholders will ask more searching questions, such as why boards authorise share buybacks instead of investing to raise productivity. Firms might also welcome shareholders who are not algorithms with trading strategies entirely unrelated to the business and where average holding is now measured in hours and minutes, not months and years.
Tomorrow’s Company—an expert in this field—tells us that, in its experience, the value of employee ownership and involvement very much depends on the degree of their involvement and their influence on the leadership of the company. The Financial Reporting Council currently has no statutory power to sanction companies for failing to comply with its code. So a lot depends on how rigorously these codes and regulations are enforced. The French think that it should be compulsory and in France there are strict laws about profit-sharing and worker representation on boards. It is similar in Germany. It does not seem to have done their economies any harm. In fact, some think that this is one reason why their productivity is well ahead of ours.
Light-touch regulation might be more acceptable to some, but in many cases it does not work. Obviously the extra force of law helps boards to challenge the company executives, hopefully spot trouble early and insist that is dealt with. Many wish that this had happened at Carillion. Labour’s proposals for a compulsory scheme of employee shareholding is on the right lines, but I would like to see it combined with an equally strong enforcement of the new code from the Financial Reporting Council.
These are Labour ideas that go back a long way. They were included in our 2017 election manifesto. In her newspaper article last weekend the Prime Minister suggested that in some things we should join her. In this matter the shoe is on the other foot. Instead of borrowing our ideas, why not join with us and help develop them? My question to the Government is: will they join us and give employee share ownership and participation in corporate governance the force of law? Join us to help rebuild the confidence and trust in business that we all agree is so essential to our future, because, whatever the outcome of the Brexit negotiations, these structural economic problems will still need to be solved. They will not go away.
I thank all noble Lords for participating in this debate. I look forward to hearing what everybody has to say and to the Government’s response.
Lord Greaves (LD)
My Lords, I congratulate the noble Lord, Lord Haskel, on getting this short debate on a topic that is suddenly topical again, quite rightly. The Question refers to two different ways to involve employees in the bodies they work for: greater employee shareholding and participation in corporate governance, which together might loosely be called industrial democracy. I believe they go together.
If we believe in the importance of individual people’s ability to control their lives autonomously but co-operating with other people in society in communities—this is fundamental to my political beliefs as a Liberal—this is a vital issue. Discussion of it has waxed and waned during my lifetime. Unfortunately, there has been a long period of quiescence, both in my party, the Liberal Democrats, and more generally, but in my lifetime it has ranged across the political spectrum, from the Liberal party, the Industrial Co-partnership Association, now the Involvement and Partnership Association, the Co-operative movement generally, the Institute for Workers’ Control, the Employee Ownership Association—I mention that as a plug for a wonderful pamphlet that has just been written by my noble friend Lady Bowles; perhaps she will refer to it in her speech—and, most recently, the announcements from John McDonnell, which have plonked this issue firmly back on the political agenda. He is to be congratulated on doing that.
I have some quotes that show how it has spread across the political spectrum. The Institute for Workers’ Control marched under a banner saying:
“No man is good enough to be another man’s master”.
Who can disagree with that? But look at the way we run society. The foreword of a report on the Liberal co-ownership proposals in 1948 was written by that great Yorkshire Liberal Elliott Dodds, who referred to,
“the saving sense of proprietorship”,
which says the same thing in rather different language. He goes on to write:
“This can be done in one way and in one way only—by laying it down that they shall have the opportunity to share in the direction and fortunes of the enterprises”,
in which they are employed. The motion passed at the 1948 Liberal Party assembly—before even my time—said that the employee is,
“to be entitled to elected representation on the board of directors”.
So the idea has been around for a long time, across the political spectrum.
At the first election I fought, unsuccessfully, in February 1974, the Liberal Party election manifesto said:
“Firstly, employees must become members of their companies just as shareholders are, with the same clearly defined right. Secondly, it must be accepted that directors in public companies are equally responsible to shareholders and employees. Employees must be entitled to share in the election of the directors on equal terms with shareholders”.
The high-water mark of the campaign for this kind of thing was the Bullock report in January 1977, the report of the Committee of Inquiry on Industrial Democracy, chaired by Lord Alan Bullock, which included such luminaries as Jack Jones, Clive Jenkins and one David Lea, now the noble Lord, Lord Lea of Crondall, who I look forward to hearing later. This was a thoroughgoing statement of co-partnership. The politics of that time meant that it did not succeed, but the majority report, at chapter 9, paragraph 13, reads:
“Our conclusion is therefore that there should be equal representation of employees and shareholders on company boards”.
There are lots of questions in the modern age relating to multinational companies, the global economic and financial environment, the flexible economy, the gig economy, bogus self-employment and all the rest, and how you deal with the public sector. I believe that this is a topic whose time has come again, both for employee share ownership and involvement that way, and involvement in the institutions of the companies. We had a letter this morning from the noble Lord, Lord McFall, the Senior Deputy Speaker, asking for ideas for a special inquiry committee for 2019-20. This is a brilliant topic on which the House of Lords could do a lot of useful work and I invite everybody here who is interested in the topic to write to the noble Lord, Lord McFall, and suggest that he put it forward.
Lord Young of Cookham (Con)
My Lords, we are constrained on time and I urge all noble Lords to participate in the corporate governance of the House and stick to four minutes.
The Lord Bishop of St Albans
I thank the noble Lord, Lord Haskel, for securing this debate. With such limited time, I shall make just a few comments about the purposes of business in general and then make one or two observations about the very specific themes raised in the debate.
All too often, business and commerce are viewed as though their main aim was simply to make the most money possible. This rather reductionist view of business fails to take into account wider questions raised in Christian theology, as well as by many others, such as how everyone can contribute to the common good, issues of justice and fairness, and particularly the sort of values we wish to celebrate and promote as a society. The best businesses, I believe, are those that balance the need to make money with a high priority on the flourishing and thriving of their workforce and a concern for human dignity.
Unfortunately, debates such as this can all too easily focus on differences between left and right. Looking at who is speaking in this debate and who is not, in terms of political parties it seems we have something of an echo of that here, sadly. My most reverend friend the Archbishop of Canterbury wrote recently in a much-publicised book:
“God is neither left-wing nor right-wing but stands above all such forms of political or economic ideology. God relates to human beings, loves the poor, the widow and the orphan, endows the earth richly with goods and fruitfulness enough to satisfy every human need, and judges our selfishness and self-seeking”.
In Christian theology, work is a positive activity and not something to be scorned or avoided. That is why the concept behind universal credit, for example, has been supported by the Church: making work pay is a good thing, even if we have serious concerns about the practicalities of its implementation. Nevertheless, the most reverend Primate was right to observe that we have a crisis of capitalism. Anger at our economic system, brought into sharp relief by the 10th anniversary of the financial crash, should be at the forefront of our minds. True dignity at work begins with a fair workplace environment, where employees have a meaningful stake in the companies they work for and where all share an interest in eliminating overwork and underpayment. To do this we need a new social contract to address low pay and poor working conditions.
Defenders of the gig economy will point to how new freedoms and flexibilities in the labour market enable many more people to fit work around the circumstances of their lives, and that is obviously good in this form of self-employment for some people in the workforce. At the same time, we risk normalising a level of insecurity in our workplace unseen since the 1930s. It will therefore not surprise noble Lords that I support the IPPR commission report’s proposals to have more workers on boards. Surely, all the evidence points to the fact that allowing employees a part to play in corporate governance can be a very positive step. I support moves towards increased transparency, towards greater gender balance and increased employee shareholding, especially if it is designed so that people are holding their shares for a significant period, for long-term investment in the company in which they work.
Giving employees an opportunity to see the fruits of their labour, in the form of shares, must surely be considered as soon as possible by this Government. While neither employee shareholding nor workers on boards are silver bullets, they are, I believe, steps in the right direction. However, without a new social contract they are unlikely to deliver the change we so urgently need.
Lord Monks (Lab)
My Lords, I add my thanks to my noble friend Lord Haskel for initiating very well this timely debate and shining a light into Britain’s often murky world of corporate governance—a world with an unhealthy reliance on short-term shareholder returns and eye-wateringly excessive levels of executive remuneration, often for mediocre performance. The result of this focus on shareholder returns is too many companies that raise debt to pay dividends and related bonuses rather than invest, and companies that asset strip and shun innovation and creativity. Fortunately, there are exceptions, but too many UK companies are anorexic. Too often they are vehicles for financial engineering rather than real engineering and high-quality performance. As the excellent IPPR report points out, our investment levels are below the developed country average. The stock of business capital is falling and our R&D investment is lower than that of our peers. It is a rather dismal tale and it has been this way for a long time.
Some 30 years or so ago my father-in-law became the chief executive of the ninth-largest Dutch company, after a decade spent in London. When I asked him what the difference between the two was, he said that on his supervisory board in Holland he had the Mayor of Rotterdam and a couple of union representatives. I asked him what difference that made and he said, “We are a lot more careful. We have to take account of a wider range of interests than we ever thought were relevant to our operations in London”. I can well understand why, in the recent Unilever case, it was seeking to relocate to Rotterdam. I believe it was to protect itself against further hostile bids. It was scuppered by the British investment houses, but I honestly think that if I were in Unilever I would be quite worried about its possible vulnerability to Heinz, Kraft or whoever—there are some giant companies looking at that company. Escape to a more protected environment was shut off.
There is no silver bullet, as was just said, but I would like the Government, in their work on the corporate governance code, to look afresh at the examples already referred to in the debate from other European countries, and to bite the bullet and provide for elected worker directors on company boards, for works councils and for a role for recognised unions. It is standard practice in many countries—countries which, let us be frank, are economically more successful, in a balanced way, than our own. The Prime Minister was blown off course in 2016; I hope she resumes the journey that she started then, bringing other stakeholders onto boards and remuneration committees—stakeholders whose perspective is not governed by their next bonus or the quarterly results. Long-term success must be the goal. Boards which are more diverse—in gender and ethnic terms as well, but more representative of stakeholders—can help with that. Action is long overdue.
Lord Cotter (LD)
My Lords, I believe that the debate today is vital, thanks to the noble Lord, Lord Haskel. I will concentrate on two aspects: leadership and management. In the 1950s, I left school, did national service and then went into a small manufacturing company, which was run along the lines of “them and us”, “us and them”. After two years I left because I could not stand the way it was run. I then started my own small business. I mentioned school because I studied the fact that businesses are not always run well. I learned that businesses were badly run in the 1930s. However, there was one mill owner we studied who ran his business well when it came to the employees.
The business I originally worked for when I left school survived, and after many years I was asked whether I would return, which I did. Within a year the managing director died, so I was asked to replace him. Immediately I changed how it was run, setting up teams around the machines, working with the workforce co-operatively. Within a short time, the firm lifted off the ground. After a few years I got involved in politics, became an MP and was very busy. So in the company we decided to change things. We involved the workforce more than ever, and in the end gave the company to the workforce to run. It is successful now and running very well as a small manufacturing company.
From my experience, I have learned that good management is essential. It is often said that productivity in the UK is not good. I believe that lack of productivity follows poor leadership. It is not only businesses—many sectors are not well managed. There is a need for training in management. Leadership is so important. Bringing people with you and listening to them is vital. Our culture has to change.
Lord Davies of Stamford (Lab)
My Lords, I thought I would make a brief contribution to this debate, because it occurred to me that I might be one of the few people in the House with some direct experience of worker representatives on corporate boards of directors. In my early 30s, my firm, Morgan Grenfell, which was a merchant bank—what we would now call an investment bank, I suppose—sent me to Paris. Although this was not the original intention of my bosses, I set up a subsidiary there, which did not do too badly. I ended up spending three years in Paris and remained president of that subsidiary after I came home to England. France, then as now, has and had had for many years a system of compulsory election of worker representatives to boards of companies over a certain threshold of numbers of employees. In the course of my three years in Paris, when I was meeting French industrialists and bankers pretty much every day, I must have heard endless complaints, and suggestions of new ideas. I never once heard any complaints about this system. It did not seem to be a problem.
Morgan Grenfell France never had enough employees to qualify for the compulsory requirement for worker representatives on the board, but I had other interests in France and was, for many years—more than I can remember, but until the day I joined the Government—a director on the main board of Vinci, which is the largest construction company in the world, and had more than 300,000 employees worldwide, about 40% of those in France. Therefore, we certainly qualified, and had two worker representatives on the board. Again, I have to say that the system worked very well. I cannot honestly say that the worker representatives contributed a great deal to our boardroom discussions, either the main board discussions or on committees. I was on the audit committee and chaired the remuneration committee. I would not have been on the audit committee if I did not have a financial background. But on my remuneration committee I always had one of the two workers’ representatives. That was an issue in which they took a lot of interest, rightly and understandably so. It was extremely useful, like when I was trying to oppose what I thought were slightly unreasonable pressures, such as you always get in successful companies from people who think that their contribution has been insufficiently rewarded.
I found that the system worked well in both directions. It was extremely useful for me, and I think for some colleagues who did the same thing, to talk to the workers’ representatives and get a feel about the situation on the shop floor, on the front line, in our various construction sites around the world; to ask generally how morale was; or to ask specific questions such as, “What do you think of the new internal training programme?” and “How are our safety measures working?”. Safety is very important in the construction industry. Any well-run board will provide lots of opportunities for informal discussion among members of the board, and during these discussions the workers’ representatives were very often able to set us right about some illusions we might have had about how things were going. It was a very useful thing—I think it helped a lot in both directions.
I can see absolutely no argument against it, and am absolutely horrified when I hear, as I once did in this country, somebody saying that if you had workers on boards they would produce endless, long, prepared speeches written by somebody else, totally ignorant, and hold up the business of the day—not at all my experience. I therefore very much welcome the initiative from my noble friend Lord Haskel to bring this idea back into public debate. I hope we follow the very successful French example.
Lord Lea of Crondall (Lab)
My Lords, this is a subject on which the Prime Minister is beating a quick retreat since she referred to it rather positively a couple of years ago. The slew of reports recently proved that it is becoming part of a new consensus, but I think it is still not quite part of the consensus in the golf club bar. This is typical of this country’s problems, in some respects. It is summed up, as I understand it, although I am not a lawyer, in the surprising but true doctrine that the company is the shareholders. That is what a company is. Is that not extraordinary?
The stakeholder model of capitalism is rather different from the British model. I will elucidate one or two consequences of this. My noble friend Lord Monks, in his interesting anecdote about Rotterdam, prompts me to give the House my favourite anecdote. A friend of mine went over to Gothenburg. His company wanted to take over a Swedish company. At lunch, round a canteen table, they had the worker representatives from both the main supervisory board, I suppose you would call it, and the works council. If your Lordships will forgive my Swedish accent, although I am rather proud of it myself, when it came to questions, the chairman of the works council said, “Mr Struthers, if you take over our company, how will that improve our world market share?”. When Malcolm got home, he said, “Do you know what happened to me in Gothenburg? I asked these people if there were any questions, and this man asked”—I will not repeat my Swedish accent, your Lordships will be relieved to hear—“about world market share. I have never heard anybody ask any question remotely like that in this country”. Am I not right? This is the division. I will not refer to this not being popular among those of my former colleagues who believe in the class struggle as an end in itself, but it is part of the consensus of the trade union movement now, in a very broad sense.
The slew of reports proves that more than 40 years since Bullock, the analysis of the nature of British inequality has moved on to become a consensus. These reports are hugely significant, not only in what they all say in similar terms but in the range of who has written them. We will not specify but it is a fact that although the Bullock committee report was greeted with ridicule 40 years ago in most establishment quarters, all I can say in the presence of the right reverend Prelate the Bishop of St Albans is that although our reward is only in heaven, in this case I hope the reward will come within 50 years. I strongly endorse the idea, which had not occurred to me, from the noble Lord, Lord Greaves, that we should all indicate in unison to the noble Lord, Lord McFall, that this would make an excellent subject for a special inquiry.
Baroness Bowles of Berkhamsted (LD)
My Lords, I too thank the noble Lord, Lord Haskel, for securing this short debate. The topic has many aspects but today I will focus, as my noble friend Lord Greaves hinted, on the employee ownership sector, which represents some 4% of UK GDP.
In June the report The Ownership Dividend was published, after a year-long UK-wide inquiry into the effects of employee ownership—EO for short. I was the independent inquiry chair, aided by distinguished individuals from 20 leading independent business organisations, who posed questions at oral hearings and guided the report and its recommendations. The Cass Business School and the Alliance Manchester Business School also attended and provided a rigorous framework analysis of the substantial evidence. We were repeatedly informed that EO stimulated long-term thinking, collaborative behaviour, ambition, transparency, good governance and well-being. We were told, “It’s like owning a home instead of renting”, and, “You get a whoosh effect in the profits”.
The dividend of employee ownership is summarised as three things: driving productivity and performance, especially of SME and family businesses; rooting jobs in regional economies and providing resilience, especially at the succession stage; and sharing wealth and influence more equally among all employees. EO businesses are not all 100% employee-owned, in the formal acronym sense. Some are minority employee-owned, some use trusts, some use direct ownership and some a hybrid. Benefits, though, are delivered because there is both an ownership stake and true ownership culture: that is what defines employee ownership, as opposed to simply employees owning shares. There is an inbuilt meaningful say.
Following introduction of the employee ownership trust—or EOT for short—in 2014, there are now 250 EOTs. The majority are outside London and that number is growing at a rate of 30% a year, in contrast to “Save as you earn” and share incentive plans, which are declining. The Ownership Dividend reported many recommendations and has an action plan of how to grow more EO businesses, covering topics from capacity-building, awareness, regional development, training and finance to removing anomalous tax obstacles and providing tax incentives.
Just this week the Employee Ownership Association, the industry body for the EO sector, submitted a further interesting proposal to HMT for an employee share ownership trust which can hold both EOTs and SIPs. Using both elements, tax-free payments of bonuses and dividends could be made to employees of up to £14,600 per annum. That is under the current tax rules. Refinements such as shorter SIP holding periods could add further attractiveness, along with other measures. I can see ways in which an ESOT could become a vehicle for employee-corporate governance participation, even if using only the SIP side. It rolls up well with ideas such as having to spend as much on free shares for employees as is spent on executive incentive schemes. We need to attract all sizes of company, public and private, into meaningful employee share ownership for the benefit of the individual, businesses and the economy. ESOTs could be the way. I hope that the various relevant government departments and Ministers will make a good study of the ownership effect inquiry’s report and its work programme.
Lord Liddle (Lab)
My Lords, I think some people will find the reason that I put my name down to speak in this debate amusing. I felt that the reaction to the proposals put forward by Jeremy Corbyn and John McDonnell at the Labour conference on these questions was harsh. I thought that the employers’ association made a great mistake in condemning them. It is unusual for me to agree with Mr Corbyn and Mr McDonnell but I agreed with them on this question. It requires rigorous thinking, however, about how we go forward and the idea of a Lords committee is a very good one.
Workers co-ops can work in some circumstances but they do not work in all of them. I am in favour of employee shareholding but we have to make sure that employees do not build up such a big stake in one company that all their eggs are in one basket if that company gets into trouble. You have to have means of dealing with that. I do not think that proposals for employee shareholding should get mixed up with proposals to increase tax on the corporate sector, which are in the McDonnell plan. We should look again at the Meidner plan, which the Swedes put forward in the 1970s, and think about why they backed off from that and how it could be improved.
As far as workers on the board go, as someone who learned about industrial relations in the Oxford school I was initially very sceptical. There are inevitable conflicts of interests in business, which is why trade unions exist, so we cannot always assume that we would get a unity of purpose between worker representatives and management. But I changed my mind about that in the 1970s and was a great enthusiast for the Bullock report—indeed, my first job as a special adviser in government was to write briefs for Bill Rodgers, now the noble Lord, Lord Rodgers, who was on the Cabinet committee deciding what to do about it.
I make two reflections on that. First, as well as putting workers on the board you have to have a bottom-up involvement of workers at all levels of the company. We could have done more in government to build on the European information and consultation directive to ensure that. Secondly, if there are to be trade unionists on the board—and I support that—they should be elected by the workers in the company, not appointed by general secretaries. That is an important principle. When it comes to international companies, we have to look at the experience of European works councils and see how they can be built on and improved.
This is an enormously important subject. I am very sorry that there are not more government Members present in the Chamber today because we have to build a consensus. Just as Keynes reformed capitalism in the 1930s to help it survive, we have to do the same today—and part of that includes serious examination of proposals for employee shareholding and workers on the boards.
Lord Stevenson of Balmacara (Lab)
My Lords, my noble friend Lord Haskel made a number of very good points in his excellent speech, including arguments for greater diversity on boards and more statutory regulation, particularly by the FRC. I hope that they will be taken forward. His key point was about the growing agreement he detected on the case for having employees on the boards of major companies and making them shareholders as well as stakeholders. He is to be congratulated on this and perhaps should feel a little smug. All those years ago, he put his money where his mouth is, and he has thrived as a result.
There is a wider issue about the structure of the public company. The Bank of England’s Andrew Haldane recently made a speech in which he said,
“despite its durability and success, across countries and across time, this corporate model has not gone unquestioned ... with a rising tide of criticism of companies’ behaviour, from excessive executive remuneration, to unethical practices, to monopoly or oligopoly powers, to short-termism. These concerns appear to be both strongly-felt and widely-held”.
If he is right, our modern company model is coming to the end of its useful life. What should we be doing about it? As has already been said, there are some good ideas to be found in the IPPR Prosperity and Justice report, which I am sure the Minister has read carefully in preparation for this debate. One specific recommendation focused on the central point of this debate and was about controlling executive pay and providing wider pay equality by putting one-third of the membership of remuneration committees out to elected worker representatives. The report goes further. It recommends that large companies with more than 250 employees should have at least two elected workers on their main board.
As has already been picked up, in other ways the report echoes the Prime Minister on the steps of Downing Street when she enthused about workers on boards and puts into sharp contrast the current, very limp, proposal by the Government to give one existing non-executive director the additional role of looking out for workers’ interests, which is a very poor substitute.
If we are to tackle more than just the executive pay scandal, and we should, we need to go further. The underlying theme of Mr Haldane’s speech and the IPPR report is that the idea that a company owes its only true allegiance to its shareholders does not reflect the relative risks shared by the wider group of stakeholders involved in the economy in the modern world. Shareholders, especially as they are now almost universally represented in pooled funds by fund managers, can diversify their risks and have no fear of bankruptcy. Workers, by contrast, have their livelihoods at stake and, usually, a longer relationship with the company. Financial creditors and suppliers take risks which they cannot diversify and suffer badly from poor management and unregulated management practice in, for example, late payment of invoices. A governance model that tries to balance these various interests looks fundamentally fairer. Why should promoting shareholder value above all else be the overriding duty of directors?
I hope that when she responds the Minister will be able to give some thought to this and I hope that in general her response will be a step-change from what we have been hearing on this topic from her colleague, the noble Lord, Lord Henley, who has repeatedly said in this House that he recognises the need for reform but has singularly failed to come up with any significant proposals. I shall mention one example. In Oral Questions on 13 March 2018 he said:
“We have also made it clear that we need to see some degree of reform of corporate governance … we think it is very important that the voice of those working for companies should be heard on the board … It is certainly something that should be looked at”.—[Official Report, 13/3/18; cols. 1507-8.]
Nothing has happened, so perhaps the Minister can go further than that.
Baroness Vere of Norbiton (Con)
My Lords, I thank the noble Lord, Lord Haskel, for securing this important and timely debate. Giving employees a stake and a voice in the organisation that they work for is important. As the noble Lord very powerfully noted in his opening remarks, it can lead to better outcomes for all stakeholders—employees, shareholders, customers, suppliers and, indeed, the Exchequer—through better-quality boardroom decision-making, stronger worker commitment to the business, higher productivity and greater influence of workers over the strategic decisions that will affect them. This has been noted by many people, not just in the Chamber today but outside. This debate is indeed very timely. The IPPR report has recently come out. It was mentioned by the right reverend Prelate and the noble Lord, Lord Stevenson.
We can all agree that employees are the lifeblood of all successful organisations and that their participation is crucial. Where I suspect we will disagree is on how government should encourage—some would prefer “force”—listed and non-listed privately owned companies to increase employee participation. Some in today’s debate—I note the comments of the noble Lord, Lord Stevenson—have criticised the speed at which the Government are acting. I cannot agree.
I will turn first to worker participation in corporate governance. As the noble Lord, Lord Stevenson, noted, the recent comments by Andy Haldane, the chief economist of the Bank of England, are welcome and timely. I am sure that noble Lords were very pleased to see his appointment as chair of the Industrial Strategy Council announced a few days ago. That council will meet for the first time in a couple of weeks’ time.
In 2016, we consulted on the Corporate Governance Reform Green Paper which, among many other things, sought views on how best to strengthen the worker voice in the boardroom. It was an extensive consultation. There were 375 thoughtful responses from businesses, trade unions and wider society. One thing was particularly striking from the responses: that no single way is the best way to strengthen the employee voice and influence at board level. Some companies favour the direct appointment of employees to company boards. Others favour dedicated and diverse workers’ councils which can reach into all aspects of the organisation. There is a huge range of approaches, each suiting the specific needs of the company, its structure and the sector in which it operates. So it became clear to us over the course of the consultation that one method would not suit all and that it would be wrong, and possibly quite damaging, for the Government to dictate a single method of worker participation.
Lord Lea of Crondall
Does the doctrine of diversity not mean that the Government are ruling out, almost for all time, any legislation?
Baroness Vere of Norbiton
Not at all—but at this moment legislation is not needed. If I am allowed to make a bit of progress I will explain how this is being put into practice.
Our reforms achieve change not by forcing companies into a one-size-fits-all approach but by providing options, supported by a clear and transparent accountability system. There are two main elements to our approach. First, we have put new reporting requirements on the statute book. They require all large companies—those with more than 250 UK employees—to explain in their directors’ reports how they have had regard to the interests of employees, including how they have engaged with them and, crucially, the effect of that engagement on decisions taken by the board during the year.
Secondly, at the Government’s request the Financial Reporting Council has revised the UK Corporate Governance Code to require boards to have in place at least one of three worker voice mechanisms: a director appointed from the workforce, a formal workforce advisory panel or a designated non-executive director. If a board has not chosen one of those methods, it will have to explain to its shareholders what alternative arrangements are in place and why they are effective.
The noble Lord, Lord Haskel, questioned the statutory underpinning of the code. It is mandatory for all listed companies. Noble Lords will be aware that Sir John Kingman is reviewing the FRC and all its activities, and we look forward to receiving his report in due course.
The Government expect these reforms to drive real change, with our large companies having effective mechanisms in place to engage with employees at boardroom level.
Many noble Lords on the Labour Benches have spoken in today’s debate and talked about Labour Party policy in this area. What do we see? We see exactly what the consultation showed us would not work. Labour is proposing a one-size-fits-all approach which we know will not suit many companies. Labour would force all large companies to do exactly the same thing, irrespective of their type, size, ownership and sector. For the reasons I have set out, we believe this would be wrong. Indeed, the personal experiences shared in the Chamber today by the noble Lord, Lord Monks, Lord Cotter, Lord Lea and Lord Davies, further support our view that one size simply does not fit all.
I turn to employee shareholding and ownership. Many businesses choose employee share ownership to involve and motivate their employees. But, crucially, employee share ownership must remain a free choice for businesses to make. However, the Government have a role to play. We can remove the barriers to employee shareholding and to employee ownership to make these easier for business. The Nuttall review in 2012, commissioned by the previous Government, identified three barriers to growth: a lack of awareness of the concept, a lack of resources to support implementation, and actual or perceived legal, tax or other regulatory barriers. The review made 28 recommendations, and these have been addressed by the Government in awareness-raising initiatives and by simplifying the relevant regulations through changes in the Finance Act 2014. So we have tackled the barriers; it is now up to the private sector to set this up and help employees to participate.
This Government back businesses, whichever ownership model they have. It is in that context that we keep under review our approach to employee share ownership schemes. I noted the comments by the noble Baroness, Lady Bowles of Berkhamsted. I have read her very good report, and one thing that struck me was that she said:
“That is not to say employee ownership is the ‘ideal’ business model, or that its impact is automatically and universally transformative”.
She is right, and that point was made also by the noble Lord, Lord Liddle. We have to be aware of people investing not only their job in a company but also perhaps their life savings.
However, we would like to see more employee-owned companies, and we have noted the recommendations. The Government keep all areas of the tax system under review and, I am sure, are looking at the proposal that the noble Baroness mentioned that was sent recently to HMT. We already offer four tax-advantaged employee share schemes that allow 4 million employees to invest in the future performance of their companies. This is alongside employee ownership trusts, which the Government have promoted since in 2014 and which offer generous tax reliefs both for employees and for business owners who sell to a trust.
Perhaps it is worth taking a moment to look at Labour Party policy in this area, which was cited by a number of noble Lords today. It is certainly radical. It would involve an immediate and significant diminution to the pension assets of all pension holders, and indeed anyone with any shares in a larger listed company. It would be an astonishing confiscation of private wealth. There would be no actual employee share ownership, merely ownership by proxy, and a cap on any upside for the employee. I wonder whether noble Lords on the opposition Benches have any estimate of quite how much extra tax the Exchequer would get as a result of this cap. Some say that it would be around £6 billion— that is, £6 billion of extra corporation tax targeted only at companies with a high dividend yield. The policy is extraordinary, and not in a good way. It would have a devastating impact on UK business and the UK as an attractive place to invest.
Noble Lords touched briefly on Section 172 of the Companies Act 2006, which is the cornerstone of the company law framework. Directors have a duty to promote the success of a company for the benefit of their shareholders. However, in doing so they must have regard to a range of stakeholders. This is the enlightened shareholder value model and we are not minded to review it at this time.
The UK has an international reputation for the strength of its corporate governance framework, which we have kept up to date with reviews and carefully considered improvements. As the noble Lord, Lord Monks, suggested, we will look at best practice in other countries, but a one-size-fits-all approach will not work.