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Worker-directors are no governance panacea

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Adopting German-style system requires changes to UK corporate culture

The question of why the UK economy cannot be more like Germany’s has been a perennial concern of British policymakers down the decades. Where, they ask, are the indigenous high-productivity companies? Where is the spirit of co-operation rather than confrontation in industrial relations?

A solution often mooted is to adopt the German practice of worker-directors — members of boards elected by the employees. This has popped up again as part of the changes to corporate governance mooted by Theresa May’s government, backed by the Trades Union Congress.

Worker-directors can fulfil useful functions, have played a supporting role in the success of some German corporations, and indeed of companies in other European countries. Yet airlifting them into the UK’s very different institutional context is only likely to work if it is part of a bigger shift in employee and corporate culture.

German “co-determination” is an idea deeply embedded into the country’s corporate tradition. The idea is that by making trade unions — and workers — partners rather than adversaries, companies can improve information flow and productivity, and avoid strikes. Worker-directors are often credited with having helped in Germany’s postwar economic miracle, providing a wider range of perspectives and binding the workforce more closely to management decisions.

They may be less useful in today’s business environment. Most growth in modern economies is driven by small and medium-sized companies where the co-determination rules do not apply, usually in the service sector. Germany has retained a cohort of highly successful export-oriented manufacturers, but has been less impressive at creating dynamic service companies.

Whether or not they are the future for Germany, implanting worker-directors into a British corporate context will be intrinsically tricky. German companies have a two-tier structure with a management and a supervisory board, with the legally mandated worker-directors sitting on the latter.

This does not translate directly into the UK practice of a unitary board, whose members are charged with pursuing the interests of the company as a whole. The governance of UK companies could certainly do with improvement. If worker-directors turned employees into partners rather than adversaries or widened the range of perspectives around the board table on issues such as executive pay, that would be progress. But making the board a collection of individual representatives of different interests within the company is not the way to do it.

The principle of worker-directors also requires a degree of co-operation from employees and unions. Where a workforce is unionised, it seems likely that the worker-directors will be union officials. But unlike its German counterpart, the British trade union movement has traditionally operated on the principle of free collective bargaining rather than corporatist co-operation.

Effecting a culture change within unions to make them part of the management process is unlikely to be straightforward. In parts of the economy where there is still an antagonistic relationship between unions and management, such as the rail sector, putting an employee representative on the board is more likely to result in stasis or conflict than co-operation.

If worker-directors could form part of a shift towards co-operation in the mindset of employees, they could play a useful role. But it is optimistic to imagine that a governance function can cross borders without requiring wider changes in practice along the way.

http://www.ft.com/cms/s/0/ecf70514-75bd-11e6-b60a-de4532d5ea35.html via @FT