Corporate Britain is treating employee engagement with contempt. This needs to change

If you want an example of how Britain’s corporate elite appears to view the subject of employee engagement, you could do worse than take a look at Rolls-Royce.

Under the 2018 revision to the UK’s corporate governance code, public companies are called upon to pay heed to “the views of other key stakeholders” in addition to their shareholders, particularly employees.

For this purpose, it is suggested that they should either appoint a worker director, set up a formal “workforce advisory panel”, or hand the job to a “designated non-executive director”.

Rolls picked the weakest of those, option three, choosing to describe its designated directors as “employee champions”.

That’s an interesting term to use given their background.

Take Bev Goulet, who handles the role for North American workers. She is a former securities lawyer turned corporate executive who led the restructuring of American Airlines when it was in bankruptcy, concentrating on “revenue maximisation, cost reduction and balance-sheet strength”. The latter inevitably included – you’ve guessed it – thousands of job cuts.

Irene Dorner, the “champion” of the rest of the workforce, is a banker and lawyer by trade. She now also chairs Control Risks Group. It specialises in corporate intelligence, which includes the monitoring of trade unionists and their activities on the Crossrail project.

It would be nice if Rolls were an outlier, but it’s not. Other firms have even gone so far as to appoint former CEOs to look after employee interests. Almost a third of FTSE 350 companies haven’t bothered with any of the code’s three options, claiming instead that their existing engagement mechanisms are adequate or citing “alternative arrangements”.

An unfortunate feature of the code is that the companies are allowed to ignore its key recommendations as long as they explain why.

Meanwhile, just five of Britain’s top 350 companies have employee directors. Four of them pre-dated the revised code.

The Financial Reporting Council, which oversees it, last month described this situation as “disappointing” in a report upon it, particularly in the light of the pandemic.

It also criticised FTSE 350 companies’ annual reports for appearing to “downplay the importance of workforce engagement, in many cases relegating it to boilerplate language in a formulaic table of stakeholders”. Quite so.

It would be nice if the big institutional shareholders recognised this as the problem it is. Having an engaged and committed workforce is a handy thing for companies to have. It helps them to succeed, and make money, which is what shareholders ultimately want.

In recent years, some institutions have proved willing to hold the feet of investee companies to the fire on issues of concern, notably climate change. But on this issue, not so much.

It’s true that some powerful asset managers boycotted the London flotation of Deliveroo over the treatment of its self-employed riders. Yet it seems their commitment to worker engagement, and fair treatment, is at best only skin deep.

When voting adviser Pirc, for example, looked at the issue, what it found was deeply disappointing. Support services outfit Capita, to its credit, has two employee directors. But Pirc said it “noticed that some investors had opposed their re-election” in the returns from its AGM last month.

In fact, the biggest vote against any director – at just under 5 per cent – came in opposition to one of the employees.

Given that FTSE 350 boards typically prefer the sort of voting support from their investors that Kim Jong-un gets in North Korea, that sends a terrible message.

It’s also notable that none of the big UK institutions, such as Legal & General, Aviva, M&G and Standard Life Aberdeen, have an employee director themselves.

I’ve spoken to CEOs about this issue and I’ve almost been able see their eyes glazing over when I’ve raised it. I’ve often felt like asking them whether they’ve ever seen Undercover Boss and thought about why that show worked so well, but watching TV is not something they spend any more time doing than they do in engaging with their workforces.

“To put our cards on the table, we are entirely comfortable with employee representation at board level,” says Pirc. “Indeed when the code came into force we wrote to the FTSE 350 to say our preferred method of the workforce engagement options was having employees directors.”

But it adds: “Currently, more asset managers seem likely to block progress on employee voice in corporate governance than to encourage it.”

This is something that needs to change, and if the market is failing to see that, it’s something for politicians to pick up.

I’ve said before that Labour’s messaging on the issue of work, dignity while at it, and representation, could and should be a lot better than it is. This is part of that. A credible opposition really ought to pick it up and run with it.