What’s the future for corporate governance?

30 May 2017 By Jonathan Chamberlain

Jonathan Chamberlain reports on the BEIS Strategy Committee’s investigation into companies’ responsibilities to their employees

Should organisations look after their employees? For many employers, this is hardly a matter for debate. But unfortunately not all are quite so enlightened.

Employment law protects individual employees, but how should they be accounted for in corporate governance? Union representation in the private sector is low, and their influence, arguably, is even lower. Unlike elsewhere in Europe, in the UK there is no statutory system of works councils. There are obligations to consult with employee representatives in a very limited number of specific situations, and no obligations whatsoever for companies to report on how well they fulfil their wider duties to employees.

These were some of the questions tackled by the BEIS Strategy Committee, a House of Commons select committee, in its report on corporate governance. Galvanised by the scandal of working arrangements at Sports Direct and the collapse of BHS, the committee looked at corporate governance in the UK as a whole. While acknowledging that corporate governance is largely good, it made a series of recommendations for improvement.

The Employment Lawyers Association, representing 5,000-plus employment lawyers throughout the UK, gave evidence and, as the chair of our working party, I attended the committee hearings. We don't know what will happen next but my crystal ball suggests that companies will have to do more to show how they are considering their employees when making decisions.

We suggested reforming the Companies Act 2006, which is not a piece of legislation many HR professionals – or employment lawyers – have to get to grips with on a daily basis. Section 172 of the Act requires companies to ‘have regard to’ the interests of employees when making decisions. What, the committee asked, does ‘have regard to’ mean? Does it mean anything?

The TUC and others said it did not. They wanted to elevate employees to almost the same status as shareholders; ie the group in whose interests the company should primarily be run. But that would interfere with the basic DNA of capitalism. Companies are vehicles for economic activity and ownership: they are not, for the most part, social enterprises – no matter how big the corporate social responsibility budget or glossy the brochures.

Our suggestion was that companies had to produce a similar reporting statement to the one they do under the Modern Slavery Act 2015 – but in respect of employees. There are no sanctions under the Act for failure to report and, although the government can force compliance through a court order, the intention is that investor and customer pressure will bring it about.

The committee went further, suggesting that the Financial Reporting Council should have enforcement powers. I suspect this won’t happen, but I think some reporting obligation is likely.

What might this mean in practice for HR? It would pressure companies to disclose employment practices: what use do they make of flexible labour? How do they engage employees? What is their turnover and relative headcount? This, potentially, is HR’s opportunity to make a significant difference to employees experiences at work.

Jonathan Chamberlain is a partner in the employment, labour and equalities team in Gowling WLG, and a member of the Legislative and Policy Committee of the Employment Lawyers Association

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