Worker representation on company boards is well established in Germany and other EU countries and now the UK Government is in a consultation process on how to implement a version of it, but Hossam Zeitoun, Assistant Professor of Strategy, warns the British economy is structurally unsuited to such a move.
The idea of worker representation on company boards in the UK is a promising move, but if it does come to fruition it may encounter the same problems that have afflicted the Conservative’s push for more vocational training.
Both of these practices are prominent in Germany, which has a co-ordinated market economy: this means that there is a lot of co-ordination between firms, employee associations and the state. They often have collective bargaining agreements at an industry level for example.
In Anglo-Saxon countries such as the US and the UK, however, there is a lot of market competition, with a flexible labour market. These countries rely more on market mechanisms, such as a market for hostile takeovers of firms and a market for intellectual property.
So taking a practice like worker representation from a co-ordinated market economy and transplanting it into a liberal market like the UK might produce very different effects, as it is not designed to be coherent with the entire market system.
This is one very prominent theory in corporate governance research - you need to make sure the system is internally coherent, otherwise it can lead to unintended consequences.
In the past, the Government has tried to push for more vocational training, but there are signs that university training colleges are struggling to attract sufficient numbers of students, and it is now looking to Germany again for methods on worker representation.
Will worker representation work in the UK?
But worker representation is part of a system that emphasises internal controls of companies. In Germany and many other continental European countries, you often find strong internal control from family owners and workers representatives on boards.
In the UK, however, there is more external control from activist shareholders and financial analysts. Introducing worker representation in the UK will mix these two control systems and that might lead to frictions.
Internally-controlled boards want to negotiate issues behind closed doors and come to a compromise, but externally-based controls need maximum transparency, so when you mix these two systems it can be difficult for them to co-exist.
An example of these two systems colliding is the failed merger of Daimler-Benz and Chrysler in 1998. It combined German and US firms, where German firms are internally orientated and US firms externally controlled.
They couldn’t reconcile the two systems, with Chrysler racking up huge losses before Daimler paid $650 million to dump the US carmaker with a private equity firm in 2007.
The proposals in the Conservative's pre-election manifesto allowed for flexibility and refrained from imposing 50 per cent worker representation on boards as in Germany.
This cautious approach is appropriate to minimise frictions between internal and external control and as the consultation process continues an awareness of these differing should systems should be at the forefront of discussions.
Hossam Zeitoun teaches Corporate Governance and Stakeholder Management on the Executive MBA, Strategic Thinking: Strategic Evaluation and Analysis on the Full-time MBA and Corporate Strategy on the Undergraduate programme.