It’s ironic that last month an arch-champion of Brexit, Tim Martin, adopted a practice common across many countries in the EU: having employee directors. The official reason is that this builds on JD Wetherspoon’s (JDW) existing policy of holding weekly meetings with pub and area managers to “distil suggestions from the front line”. It’s also in keeping with its policy of paying employees a bonus in cash and shares that pre-pandemic used to equate to over half the annual profit.
Martin owns 22 per cent of Wetherspoon and is its executive chairman. He regularly complains that aspects of the UK corporate governance code impede directors from fully understanding the business and culture of their companies. He’d like to see changes that reflect his own position, such as having long-serving executive and non-executive directors and companies being chaired by their former chief executives. These, he says, would deter boards from making decisions that are too short-term, and his past calls for more executive and employee directors were consistent with this.
This last view was supported by Theresa May when she became Prime Minister, but she settled for a fudge. Instead of requiring companies to appoint employee directors, they were instead permitted either to set up a formal workforce advisory panel or to give responsibility for raising workforce issues to a non-executive director. Most have plumped for the last option.
Of the few companies that have employee directors, Capita (CPI) has had two since 2019; and Frasers (FRAS) has a “non-executive workforce director and workers’ representative” on its board. Most democratic is FirstGroup (FGP), whose main board employee director is nominated from a forum of 14 local employee directors, themselves elected by the workforce in their respective operating companies. At Wetherspoon, “suitable candidates” from its 43,000 employees were invited to apply for the new roles, and the company selected the four from the “talented and experienced” hundred who replied. Two have been made full directors, and two more “associate directors” who will sit in on, and take part in, the board discussions.
Employee directors can add value, for senior managers too often think they know what’s going on, but don’t realise how practical details can make issues more complex than they appreciate. In theory at least, casting the net wider adds to diversity, and the ongoing ground-level experiences brought by employees will add fresh perspectives that challenge entrenched attitudes.
Most companies have reservations. They fear that employee directors will be too worker-centric. Other directors will assume they represent employees alone. That could create conflicts of interest, for example if redundancies were being planned. Confidentiality could be a problem. What if there’s a crisis? Will they understand specialist issues, or will some just go over their heads? Discussions would become lengthier. Critical decisions could be delayed. Directors might find themselves no longer sharing a common purpose. That would then risk creating two classes of director.
Nonsense, say the advocates. Current company law blocks these objections. Since every director has a legal duty to act in the interests of all shareholders, an employee takes on the same legal responsibilities as anyone else who becomes a director. Anyone new to the role needs to appreciate and understand what the implications are. They deserve detailed training and a thorough induction process. There’s no reason why employees won’t ensure that what’s discussed in the boardroom stays in the boardroom. And yes, they really do have more of a vested interest in promoting the long-term success of the company than non-executive directors (who by definition, are not employees). Their livelihoods depend on it.
The directors’ collective responsibility for all board decisions is a feature of the unitary board structure of UK companies. Countries in the EU have a different approach that overcomes many of the reservations about employee directors. Germany for example, has a two-tier board system. Worker representatives sit on a supervisory board, but it’s the other one, the management board, that makes the binding executive decisions and gives the formal orders.
Adding two employee directors to Wetherspoon’s unitary board has shifted the balance – non-executives are now outnumbered by six to four. Employees are no substitute, for too much criticism by them could be career limiting. And non-executives who remain in their roles for too long risk gravitating towards 'groupthink'. That’s why the UK corporate governance code recommends that they serve for no more than nine years. They need to be independent to control the excesses of chief executives.
That’s important for Wetherspoon, because there’s been a lack of restraint in the past. In 2016, Tim Martin used its pubs (926 then, 861 now) as a personal platform for promoting Brexit. That triggered a protest group from among his employees and censure from Pirc, an external body, for spending £95,000 on a political campaign without shareholder approval.
Unless there are effective controls, the only restraint on executive chairmen is self restraint. With a minority of truly independent directors, who in future will rein Tim Martin in?
