Monday, 16 July 2012

Are worker directors good for business?

Aoife Ní Lochlainn: TASC has today published a report on Worker Directors in Ireland, Good for Business? Worker Participation on Boards. This project, supported by the National Worker Director Group, aimed to examine the role and contribution of the worker director to the board and to corporate governance.

Employee participation on boards is common is many European countries. Some countries, such as Germany provide for worker directors in both the public and the private sector. In Ireland, employee participation at board level is underpinned by the Worker Participation Acts 1977 and 1988. This allowed for worker directors in a limited number of state-owned enterprises and government agencies.

The architects of this legislation had a vision of the company as a ‘social institution’. They believed that as the activities of a company had a wider social impact than that of the financial bottom line that boards should governed by the stakeholder approach rather than the shareholder approach.

In the words of the then Minister for Labour Michael O’Leary,
“Ownership of its physical assets [the company] is no longer regarded as conferring an absolute right to exercise control without taking into account other interests such as those of employees or society generally.”

Worker participation in decision-making was regarded as a right; a form of industrial democracy. It was also seen as providing other benefits to the company, including improved decision-making and a greater appreciation for the contribution of the worker.

While worker directors have been widespread in Europe for over thirty years, there is relatively little evidence on the impact that this has had on company performance and what evidence exists is equivocal. A 2011 European Trade Union Institute review of relevant studies found that the evidence was inconclusive. Ten studies found some positive effects of board level representation, while eleven studies found no significant effects, positive or negative. Seven studies found negative effects.

The TASC study seeks to examine the role and contribution of the worker director, and possible conflicts inherent in that position. A focus group comprising nine worker directors from six different companies and organisations was held. Thirteen interviews were also held in order to ascertain the opinions of non-worker director board members, company executives and independent experts. The issues discussed included the following:

  • To what extent do worker directors have conflicting loyalties between their board obligations and obligations to their electorate? 
  • What are the implications for industrial relations?
  • What is the nature of the relationship between worker directors and other board members? Is it one of mutual respect or is it characterised by distrust and conflict 
  • Are worker directors treated equally to other non-worker director board members? Are there any restrictions on their participation in board committees for example? 
  • Do worker directors make a unique contribution to corporate governance and the operations of the board, and if so is this contribution positive or negative? 

Overall, it was found that worker directors were felt to be loyal, trustworthy and diligent in their duties. The contribution of worker directors to corporate governance was felt to be unique and positive by over three quarters of interviewees.

The intimate and operational knowledge of the organisation was seen as a positive contribution to the board. The role of the worker director in providing a contrary voice which could help avoid groupthink was highlighted by many interviewees.

Worker directors are generally treated as equal by their board colleagues and almost all respondents stated that they had never heard of a breach of confidentiality or conflict of interest in relation to worker directors. However, almost all worker directors interviewed felt excluded from the audit and remuneration committees, and in particular felt that CEOs would not welcome a worker director on a remuneration committee. This perception was borne out by non-worker-director interviewees, over half of whom felt that worker directors should not sit on remuneration committees due to a potential conflict of interest.

The contribution of the worker director to the area of industrial relations was seen as extremely positive, primarily as they can act as a two-way conduit for information in times of conflict.

However, it was felt by many interviewees that employees should be better educated as to the role and obligations of the worker director, to avoid any false expectations on those who are elected.

 Most non-worker director interviewees felt that the model should be extended across the public sector. This was the hope of the original architects of the legislation. However, worker directors are not without their critics. In a 2003 article in the Irish Times, Niamh Brennan wrote:

“in the case of worker directors elected by staff, their central interest would in many cases be that of the employees who elected them, which would not necessarily be consistent with the legal requirement of directors owing their fiduciary duty to the company.”

A clear finding of this report is that the worker directors understood that worker directors are under the same legal obligations to the company as all other directors. Equally, the non-worker director interviewees believed that the worker directors act in the best interests of the company.


Anonymous said...

The intimate and operational knowledge of the organisation was seen as a positive contribution to the board.

Is it not the case that the worker directors are almost always union hacks, as opposed to ordinary workers?

So the intimate and operational knowledge they bring to the table is not so much of the actual workings at the coal-face, seeing as some of them wouldn't have seen the coal-face in decades.

Rather they would be experts in the mechanics of climbing the greasy pole of internal union politics.

A useful skill to share in the pub after a ICTU conference, but of close-to-zero value in guiding a commercial organization.

Aoife said...

Dear Anonymous,
As discussed in the report, worker directors are distinct from trade union officials. They are elected by all employees of the organisation, whether they are unionised or not. Where a company is unionised, it is more likely that a union member will be elected, but not all of the organisations are fully unionised.

The worker directors continue to work in their full time jobs in the company (at the coal face as you put it) and are generally given time off for their monthly board meetings and any other board business (e.g., board subcommittee work, training and site visits etc.)

As part of this research, we interviewed 11 non-worker directors from a variety of companies and two independent governance experts. These interviewees were a mixture of CEOs, company secretaries, company chairpersons and ordinary board members.

"The intimate and operational knowledge of the organisation was seen as a positive contribution to the board", was highlighted by a majority of the non-worker director interviewees, who between them have decades of board and management experience.

Thank you for your comments,

Robin Wilson said...

Well done Aife. Discussed this with Nat yesterday over lunch. Very useful piece of work. Best, Robin

Anonymous said...

Aoife, some examples from the largest, most valuable semi-state companies with their direct-from-the-coal-face worker directors.

Sean Kelly: branch official in the Limerick No.2 Branch of the T.E.E.U. since 2002, Branch Organiser since 2009, currently the Chairperson of the Mid-Western Local Implementation Group

Dave Byrne: Group of Unions representative in Central Partnership

Bord na Mona
Paudge Bennett: delegate to the Group of Unions for 18 years

Paddy Fox: delegate to the Group of Unions for 20 years

Of course any worker can run for election, but it doesn't take much beyond a quick google to find examples of union attempts to deliver a block-vote in favor of their approved candidates.

Michael Taft said...

Aoife - thanks for this excellent report. It is long past time that the issue of greater economic participation and democracy was put on the agenda. The report is strengthened by accepting the challenges and potential difficulties in reinforcing and extending the concept of worker-directors throughout the public and eventually private sectors. This is particularly evident in the measurement issues you mention.

What is not in question, however, is the need to extend the participation of stakeholders. Worker-directors are likely to have a more long-term interest in the firm than political appointees, hands-off institutional investors or short-term investors. Even Adam Smith referred to the phenomenon of 'distant' investors.

It is interesting that the examples that Anonymous uses actually reinforces this point. The two Bord na Mona worker-directors referred to have between them 79 years of experience with the company, both starting from the very 'bottom' as seasonal workers. The insights that such experience with all aspects of the company have would be an important asset for any company.

And that is the point: economic democracy is about organising and maximising the 'assets' of firm activity. At the top of the list is the people who work there - that is, the actual creators of the wealth of the firm.

Who could be against that?

Anonymous said...


The issue is not at all that ordinary workers can't provide valuable insights from the coal-face. They can, and they should be allowed to do so.

The problem is more in the way worker-directorships in the Irish semi-state context quickly degenerated into a union-inspired Buggins's turn, allocated to longstanding union place-men.

All part of the mutual back-scratching and "partnership" culture, where the state indulged the unions in order to buy industrial peace. This involved ceding positions of power & prestige to prominent trade unionists, without any regard to their qualifications or suitability. One only has to look to the board of the Central Bank during the boom.