What’s the Story?

Governance & Compliance, the Chartered Governance Institute magazine, covers FRC research on Board Level Employee Representation in the July/August 2024 edition.

The UK Corporate Governance Code 2024 continues to require Board Level Employee Representation (comply or explain - absent alternative arrangements) for companies to:

• Appoint an employee director; or

• Designate a non-executive director responsible for conveying employee views to the board; or

• Adopt a formal workforce advisory panel. (S1. Para 5.)

In addition, workers should be able to raise concerns in confidence, and the Board should review these arrangements routinely and ensure appropriate investigation and follow up action (S1. Para 6.).

The FRC survey research summarises FTSE 350 practice and the key findings for 70 companies with 41 interviews and 17 case studies. It shows in response to the then new 2018 requirements It found that:

• 68% of companies adopted one, or more, of the requirements; and

• 32% chose alternative arrangements.

Of the 68% of company adopters:

• 40% designated an employee NED

• 12% established an advisory panel; and

• 16% combined a designated NED with an advisory panel.

• Only one appointed an employee director.

The FRC survey findings can be found here.

Why Does it Matter?

The 2024 UK CGC is effective for reporting periods starting on and after 1 January 2025 - just a few months from now.

While several CGC changes were proposed recently, they were non-adopted. However, the 2018 board level employee representation requirements are unchanged in the 2024 code.

Companies can view this requirements as a “comply” exercise; or instead engage fully with the employee voice in a way which should provide much commercial value.

Compliance has a sunk cost. No one judges the return; aside from the fines and related imposts.

But the “beyond compliance” on-cost should be judged against the extra potential return of deeper insights and employee engagement. The likely upshot for many will be that the returns much exceed the marginal cost of the beyond-compliance step. This is not an ideological pro-employee matter, it is a simple, commercial judgment.

Non executive directors designated to represent the employee view should be supported fully. Yet some may feel hesitant to assert employee views in the boardroom strongly and with confidence. And why might that be?

Perhaps their information sources are patchy, or organic. Maybe company provided sources such as survey and complaints protocols dominate. Employee suggestion boxes are a longstanding joke. Most contain nothing except a dead fly and an old shirt button.

Another concern may be the balance of their director duties. The NED “designate” role is not one of employee advocacy. Instead it should balance the needs of the business with the employee views expressed. But that might mute the message to others on the Board less attuned to the function of that designate role.

NED support in the designate role needs attention. In all cases the Chair should oversee the correct unfolding of process and ensure strong support. Employee views reaching the board by this mechanic alone though, so absent separate management information, seems lame.

Newspoint View

Companies ought to consider measured investment in gathering and hearing the employee voice fully. If that entails new MIS and spend; that highlights the need.

Intangible investments are now common, and real. Their hard to judge soft returns are nonetheless observed commonly for spend on marketing, training and R&D for example. Those things proceed as obvious, over decades, within many industries, and globally. And rightly so, as intangible goodwill within overall market capitalisation expands inexorably.

This investment decision is unsuited to the classic IRR and NPV analysis. That often does not work for intangibles. As intangible asset values within market cap continues to expand, a serious rethink of NPV and cost minimisation company culture is needed. And that thought is not limited to the employee voice investment.

In the 1980s it was fashionable for companies to assert that:

      “Our employees are our most valuable asset.”

This was visibly untrue, in many cases because the fixed asset base of the heavy industries then in point, clearly out-weighed the intangible value of the employee skills by far.

But what about now? Well, with the growth of knowledge industries, that same statement is likely to be strongly true now.

So what better time to embrace the future, and build value on the whole of the knowledge base of the company? And that means building the listening systems needed to hear the employee voice clearly and act upon that which is heard.

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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