The Workforce Engagement Mechanisms in the UK: A Way Towards More Sustainable Companies? (Part 2)

Workers play an important role in companies, even though their direct involvement in corporate governance processes seems invisible or marginal. While shareholder primacy has been justified by the argument that shareholder interests are equivalent to those of the company, the interests of company workers are closely aligned with those of the company and the company’s long-term success. Arguably, the role of workers can be crucial in addressing new challenges faced by companies and in implementing initiatives within the framework of corporate sustainability.

In 2018, the UK Corporate Governance Code (‘UKCGC’) introduced for the first time—through Provision 5—workforce engagement tools. This provision states that one or a combination of the following methods should be used: (i) a director appointed from the workforce; (ii) a formal workforce advisory panel; (iii) a designated non‑executive director. If the board has not chosen one or more of these methods, it should explain what alternative arrangements are in place and why it considers them effective.

In our recent study (Part 1 of the project), we evaluated the early stages of the implementation of Provision 5 workforce engagement tools by FTSE 100 companies in 2019, the first year the UKCGC has been in force (see here). The analysis was framed by reference to the alternative approaches of ‘Outcome vs Control’ and ‘Process vs Disclosure’, and the main conclusion was that the workforce engagement processes do not seem to be well-embedded as yet, despite the engagement tools being in place.

In the current study (Part 2 of the project), we continue to evaluate workforce engagement tools introduced by Provision 5 based on the 2020 data (the second year this provision is in force). Our paper takes the analysis a step further by focusing on the engagement mechanisms as a tool to ensure more sustainable companies. Sustainability is a broad term, but one of its key themes is how corporate governance and financial regulation might contribute to resolving or mitigating externalities. As proposed in earlier research, we see sustainability as the overarching concept, with Corporate Social Responsibility (‘CSR’) and Environment, Social and Governance (‘ESG’) as sub-sets (CSR is more focused on the ethical dimension of corporate behaviour and operational decision-making within a company, while ESG factors are associated with portfolio investment and are focused on financial risk and return).

We view the Provision 5 workforce engagement tools as one of the available channels leading towards the ‘Entity Model’ of ESG (a model that locates accountability more clearly with the board, focusing on internal decision-making), with the aim of making suggestions on how to improve stakeholder participation in corporate governance. Provision 5 is not only a stakeholder empowerment tool but can be seen more broadly as the start of a process of experimentation to determine the best ways to engage all stakeholders in board decision-making. Moreover, Provision 5 can provide an effective model for the development of the social dimension of sustainability, which to date has attracted less attention in the ESG model of sustainability.

The location of Provision 5 in the UKCGC means that it is not a classic experiment (as it has already been institutionalised), but its flexibility does arguably allow it to operate in that way. This means that Provision 5 models could evolve over time and influence engagement by other stakeholders. Alternatively, it could also help to explain an end point in which the experiment had failed and direct regulatory action was necessary—the experimentation paradigm would let us track the Provision 5 data over time and report the results of the ongoing experiment without pressure to reach a clear outcome before the experiment itself supported such an approach.

We argue in the paper that workers’ engagement and participation in corporate decision-making is a critical missing element of the UK’s corporate governance system and therefore implementation of Provision 5 engagement tools and the creation of an effective engagement strategy are of paramount importance. However, we assert that on their own even well-functioning workforce engagement tools are unlikely to improve the standards of workforce engagement, and a more integrated (‘bundled’ or ‘package’) approach to workforce engagement and participation is required.

The full paper with all our results and conclusions can be found here.

Dr Katarzyna Chalaczkiewicz-Ladna is Lecturer in Commercial Law at the University of Glasgow.

Prof Irene-marie Esser is Professor of Corporate Law and Governance at the University of Glasgow and Extraordinary Professor at Stellenbosch University.

Prof Iain MacNeil is Alexander Stone Chair of Commercial Law at the University of Glasgow and Head of the Corporate & Financial Law Research Group.