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Report On Business Newly minted British PM Theresa May takes aim at corporate governance, proposes reform

Britain's new Prime Minister Theresa May speaks outside 10 Downing Street in central London on July 13, 2016 on the day she takes office following the formal resignation of David Cameron.

JUSTIN TALLIS/AFP/Getty Images

British Prime Minister Theresa May has been in office for less than two weeks, but she's already rattled the country's business community with a series of proposed changes to how companies are managed.

Ms. May has taken particular aim at corporate governance and proposed two significant reforms: requiring companies to add employee representatives to boards, and make annual shareholder votes on executive pay binding.

"It is not anti-business to suggest that big business needs to change," Ms. May said in a speech just minutes before she became Prime Minister when her last rival for the Conservative Party leadership dropped out.

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The remarks caught the business community off guard and Ms. May has yet to flesh out any details. But her comments have prompted a lively debate about whether her ideas can actually work.

Unions in Britain have been advocating employee representatives on boards for years, saying the current system is outdated and puts too much emphasis on shareholder interests.

But only one British company has adopted the idea. Aberdeen-based FirstGroup PLC, a bus and train operator, has had one non-executive employee director on its nine-member board since 1989. Currently, it's Mick Barker, a train driver who was elected to the board by staff.

The practice is more common in other European countries, in particular Germany, which has a two-tiered board structure – supervisory and management. Supervisory boards oversee general corporate strategy and up to half of the directors are employees, with the remainder elected by shareholders. They appoint the management board, which monitors day-to-day operations.

Tony Dobbins, a professor of employment studies at Britain's Bangor University, said employee directors can give management a different perspective. "There is a history of successful worker representation on boards including First Group in the U.K., and in European countries like Germany, Austria. Clearly, the current U.K. model is broken and needs fixing," he said in an e-mail.

But others aren't so sure.

"It's not that it would be unworkable, but it would pose a number of problems for companies," said Oliver Parry, head of corporate governance policy at the Institute of Directors, which represents thousands of British businesses.

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Mr. Parry said the problems include how these directors would be selected, what training they would require and what responsibilities they would have. He also wondered how they would mesh their legal obligation as a director to act in the best interests of the company, with their role as an employee representative. "The board operates on the principle of collective responsibility," he said. If something goes wrong, the employee representative "needs to be aware that they are under the same criminal liability."

As for binding annual shareholder votes on compensation, many experts say that would be difficult to implement.

Currently, British companies must get shareholder approval for their executive-compensation policy at least once every three years. Annual votes on compensation payments are only advisory. Making those votes binding would have far-reaching consequences and require changes to employment and contract law, said Paul Lee, head of corporate governance at Aberdeen Asset Management.

"It's a pretty fundamental change to be making," he said.

He added that executives would likely ask for more money or greater security if they knew their annual pay would be subject to a shareholder vote. And shareholders could become less likely to vote down pay packages if they feared executives might quit as a result.

Mr. Lee isn't against binding votes, he said, but first "let's work out what it is that we might choose to bind the company to do."

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The previous coalition government of Conservatives and Liberal Democrats examined the idea in 2012, but decided against it. One option considered was to appoint employees to board compensation committees, or give them access to those committee meetings.

Mr. Parry said Ms. May's proposals reflect a discontent with big business that surfaced during the recent referendum on the European Union. Despite urgings from more than 1,200 executives to remain in the EU, the country voted for Brexit. "And I'm afraid to say that is endemic of how trust in our biggest corporations is really poor at the moment," Mr. Parry said. "She suggested some potential remedies, and I'm open to this."

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