The winds of change are blowing on some established concepts of corporate governance. For the purposes of this article, attention is focused on two of these concepts.
First, well-established thinking on shareholder primacy in the governance of companies is being replaced by stakeholder governance. There is wide recognition by experts in corporate governance, including academics and senior business leaders, that the duties of directors are not confined to advancing the interest of shareholders; there are other stakeholders whose interests are also relevant and require recognition. These include employees, customers, suppliers, the local community and the environment, among others.
An excellent analysis of current developments in corporate governance is contained in the recently published book by leading academic Professor Rebecca Henderson: Reimagining Capitalism — How Business Can Save the World. Henderson draws attention to a statement released in August 2019 by the Business Roundtable, an organisation composed of the CEOs of many of the largest and most powerful American corporations.
The statement redefines the purpose of the corporation: “To promote an economy that serves all Americans” — with 181 CEOs committed to lead their companies for “the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders”.
Of the multiplicity of stakeholders referred to as being customers, employees, suppliers, communities or shareholders, it is appropriate, in the context of the objective of this article, to comment in somewhat greater detail on the position of the employee in the life of the employer company.
Not only does the employee render valuable services to his/her employer, but of equal importance, the fate and wellbeing of the employee is inextricably bound up with the fate and wellbeing of the employer company. This submission is well formulated by former president Bill Clinton’s first Secretary of Labour, Robert B Reich, in his book Saving Capitalism – For the Many not the Few. Reich pleads his case very convincingly as follows:
“Besides, shareholders are not the only parties who invest in the corporation and bear a risk that their investments will drop in value. Workers who have been with the firm for many years may have developed skills and knowledge unique to it. Others may have moved their families to take a job with the firm, buying homes in the community. The community itself may have invested in roads and other infrastructure to accommodate the corporation.”
Reich contrasts the position of the employee with that of the shareholder, who is often mobile, short term and an investor for speculative gain rather than having a commitment to the long-term wellbeing of the company.
Secondly, another pillar of corporate governance, the composition of the board of directors, is also under scrutiny. Diversity of the board’s composition is widely acclaimed by corporate governance experts and senior business leaders. Included in diversity is gender and race. Also, background, skills and expertise are widely regarded as being important.
It is submitted that individually and collectively the factors referred to above provide a powerful argument in favour of employee representation on corporate boards. The employee cohort is an important stakeholder, with a commitment to the wellbeing of the employer company and a knowledge of its operations. It follows that its voice in board deliberations would be useful. It should also contribute to harmonious industrial relations.
If the philosophical threshold is crossed in favour of a mandatory requirement to have employee representation on corporate boards, a number of important issues arise regarding implementation. These are dealt with later in this article.
The purpose of this article is to ignite debate and promote discussion on this important topic. We have reached a milestone in the development of corporate governance.
Clarification of certain concepts
In the Anglo American approach (which includes South Africa) to corporate governance, the unitary board is paramount. In European countries it is common to have worker participation on corporate boards with dual board structures. This is known as co-determination. Nothing in this article must be construed as a departure from the unitary board structure.
Secondly, importantly, all the proposals considered in this article are made within the well-established legal framework and principles forming part of South African company law. It is further submitted that any implementation of the submissions contained in this article must be made within the architecture and structure of the existing legislation and common law principles which regulate companies in South Africa. To do otherwise would be subversive of the existing company law regime in South Africa, with adverse consequences.
Thirdly, all existing legislation governing workers’ rights, collective bargaining, employment law, employment equity, among others, must remain unaffected by any of the proposals considered in this article.
Important questions regarding implementation
As stated, a mandatory requirement to have employee representative/s on corporate boards gives rise to a number of important questions surrounding the implementation of any such requirement. These include:
To which companies must the mandatory requirement of having an employee representative apply?
It is respectfully submitted that it should not apply to family companies or to companies not really falling within the domain of public interest.
It would more appropriately be applicable to companies involving a public interest, such as state-owned companies, listed companies or companies having a minimum public interest score based on number of employees, liabilities, turnover and shareholders. These are the factors comprehended in Regulation 43 of the Regulations to the Companies Act No 71 of 2008, as amended (the “Act”), being the criteria for the requirement for a company to have a social and ethics committee.
Eligibility to serve on the board as the employee representative
As a point of departure, any person who is suitable for appointment or election to a board should be eligible to serve as the employees’ representative.
Should such a person be an employee of that particular company?
Ideally, that would be so, but employment by that particular company should not be an absolute requirement.
Must there be more than one employee representative?
It is, in the dynamics of the boardroom, a lonely existence to be the sole representative of an interest group. The efficiency of that representative is greatly enhanced by including at least one more representative. Experience shows that the confidence of special interest groups’ representatives is increased by numbers.
How will the employee representative be appointed or elected?
One of the more vexed questions is how the employee representative should be elected or appointed to the board. What process should be adopted?
In this regard, it is respectfully submitted that the entire architecture of the Act should be taken into account. That would be consistent with the approach adopted in this article to the effect that the employee representative is simply a director on the board with a particular skill base, background, knowledge or experience, and having the same rights and duties as the other directors.
There are a number of provisions in the Act that regulate the appointment or election of new directors, which could be used to ensure the inclusion of the employee representative. There are provisions for filling casual vacancies by requisitioning a meeting to elect new directors, as well as the election of directors at the annual general meeting.
The actual selection of the identity of the proposed employee representative should not be the right or responsibility of government or any other entity. The existing architecture of the Act neatly accommodates this, as does the corporate governance requirement of receiving recommendations from the nominations committee.
Sanction for non-compliance with mandatory requirement to have an employee representative
Compliance with the mandatory requirement necessitates the imposition of appropriate sanctions in the legislative matrix. Again, this is best achieved within the existing provisions and structures of the Act.
A theoretically possible solution would be a statutory provision that, for so long as non-compliance continues, all resolutions of the board would be invalid. This is too draconian and would operate unfairly on bona fide third parties dealing with the company who would have no means to determine whether there has been compliance.
A more sensible sanction, apart from the strictures imposed by the marketplace, is to embody in the new legislation that non-compliance with this mandatory requirement would in itself be grounds for an application for a declaration, in terms of the relevant provisions of the Act, of delinquency of one or more members of the board, having all the consequences of being declared a delinquent director.
It is stressed that this would simply be grounds for such an application; non-compliance would not automatically have the consequence of a declaration of delinquency.
Rights and duties of the employee representative
It is submitted that the employee representative on a company’s board should be subject to the same rights and duties as those applicable to all directors. Any special dispensation for the employee representative would be subversive of established principles of company law regulating directors. The consequences would be significant both legally and commercially.
The employee representative would form part of a collegiate team always acting in the best interests of the company. Clearly the company’s best interests can only realistically be achieved when due consideration is given in arriving at decisions, to the interests of its stakeholders. In this regard, the employee representative would be an important voice informing his/her colleagues of the implications to employees of proposed corporate action. It would also provide an important perspective when remuneration for senior executives is under consideration.
In a unitary board structure, which is our model, all directors are subject to a single regulatory regime no matter whose interest they are nominally required to represent. This will apply to every director who is included in the board’s composition for his/her special skills, background, race, gender or community. An important reminder in this regard was given by the Federal Court of Australia in a recent judgment, the relevant extract reading as follows:
“A board should be established which enjoys the varied wisdom, experience and expertise of persons drawn from different commercial backgrounds. Even so, a director, whatever his or her background, has a duty greater than that of simply representing a particular field of experience or expertise. A director is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside the area of the director’s expertise.”
Any proposal for having a mandatory requirement for the composition of the boards of certain companies to include an employee representative is likely to ignite robust debate, particularly between business and labour. The method by which such a proposal is to be implemented and the suggested rights and duties applicable to the employee representative on the board will probably be even more heavily contested.
None of the above should, however, have the effect of deflecting or postponing the ventilation of this important issue in corporate governance. A fairly solid volume of literature is building up in other jurisdictions sharing similar legal and corporate governance principles as those which are applicable in South Africa.
The introduction of such a requirement may be particularly timely and beneficial in South Africa. BM/DM
Reindeer can see UV light.