So that’s it: the music has stopped and the last person standing was Theresa May who will become the UK’s prime minister tomorrow. Whilst a period of calm might be welcomed after the turmoil of the last few weeks, there were indications in her speech yesterday that companies can expect some key changes under the new Government.
Employee and consumer representatives
According to Theresa May the current system of non-executive directors holding the executive team to account, by asking difficult questions and defending the interests of shareholders, is flawed. Non-executive directors are ‘drawn from the same, narrow social and professional circles as the executive team’ meaning they fail to represent the interests of wider stakeholders and the scrutiny they provide is not good enough.
To solve this, Theresa May has proposed that both consumers and employees will be represented on company boards.
Germany v England
The suggestion of employee representatives indicates that the new PM may be a fan of the German system. German companies have a two-tier board structure with an executive ‘management board’, responsible for the day to day running of the company, which is overseen by a ‘supervisory board’. Large German companies must have at least one ‘staff director’ on the management board to represent the views of the organisation’s employees. In addition, the supervisory boards of those large German companies have half their members elected by the employees, with the other half being elected by the shareholders. The supervisory board can remove members of the management board for good reason, including where there has been a vote of no confidence by the shareholders.
By contrast, English companies only have a single formal board made up of legally appointed directors. Whilst many companies also have an informal ‘operations board’, tasked with managing the company’s day-to-day activities, legal power and responsibility rests with the formally appointed board. Directors of UK companies are usually appointed either by the shareholders or by the other directors.
Will there be penalties?
If Theresa May’s proposals for consumer and employee representatives are mandatory (which would require a change in the law) then failing to comply would presumably carry some penalty – most likely a fine for the company and any of its officers in default.
If, as seems more likely, the measures are introduced via the UK Corporate Governance Code then breach would not result in any automatic penalty. The Code applies to companies with a premium listing of equity shares on a voluntary ‘comply or explain’ basis. Companies are required to state each year how they have applied the Code’s principles, the extent to which they have complied with them and, where they have not complied, the company’s reasons for non-compliance. Whilst failing to comply with the Code does not result in a penalty as such, it would affect investor confidence in the company.
They think it’s all over…
The statement from Theresa May is merely an indication of a potential policy, rather than a definitive change in the law and it may be sometime (if ever) before we see the proposals come into effect. Whether the change is mandatory or voluntary (on a ‘comply or explain’ basis) it does seem likely that any requirement for employee or consumer representatives at board level would only apply to larger companies and the proposals are unlikely to affect smaller private companies.