Comment

Conflicts of interest: worker directors

Oct 01, 2018
While there are arguments for the exclusion of worker directors, it is worthwhile to consider the alternative view.

BY PROF. PATRICIA BARKER

Prof. Niamh Brennan, writing in the June issue of Accountancy Ireland, addressed the issue of conflicts of interest threatening the ability of directors to look after the interests of the company unimpeded by a personal interest they may have in a specific issue or, indeed, in the ongoing business of the company. Niamh’s points are very well made and she promotes a pro-social good-of-society perspective, which is a very desirable outcome.

Niamh, in her reflection, raised the question of whether it is possible for worker directors on State bodies to avoid conflict of interest given that they must, as directors, act in the best interests of the company. Meanwhile, by virtue of their election by the body of workers, they must also act in the best interests of their electorate. It is, indeed, an important question to consider.

The arguments for excluding worker directors are well set out by Niamh. In reaching a conclusion, it is worthwhile to consider the arguments in favour of worker directors.

1. Employee experience

Organisations are gradually recalibrating their perspective on good governance by reflecting on, and articulating, what their corporate culture is rather than focusing on compliance with increasingly bulky and onerous codes of practice. Much work has been done in researching the broad types of culture that can be observed, ranging from a clan culture (where the emphasis is on people, teamwork and consensus) to an innovative culture (with emphasis on entrepreneurial vision) to a market culture (with emphasis on market share, competition and goals) and a hierarchical culture (with stress on procedures, stability and smooth execution). The board members have to establish and drive their strategy and business plan from their cultural base. In organisations espousing the first two types of culture mentioned above, it would be important to hear the employees’ experience and perspective on the board. Arguably, the voice of the employee would also be significant in the other two groupings.

2. Clear delineation

We should consider the fundamental assumption that the worker directors have a conflicting interest in pursuing upward pressure on payroll, while the interest of the board is to pursue the maximisation of residual profit for the shareholder, with a concomitant downward pressure on payroll. This notion is probably less valid now than in the days of clear delineation between the management on one side of the industrial relations (IR) ditch with the serried ranks of the workers on the other, engaged in battle.

Many organisations are much flatter now and the human capital invested by skilled employees often means that they have an informed and vested interest in the long-term sustainability of a reputable and high-quality organisation, the same interest as other directors. In other words, their interests as employees merge with their interests as directors. What might give rise to question, however, is more likely to be the interest of executive directors in the private sector who have a conflicting interest in producing high profits (associated with their performance-related pay) against the interest of sustainable performance over a period longer than their contract of employment.

3. Fresh perspectives

I am unaware of any research which shows that worker directors behave in a manner counterproductive to the creation and implementation of an agreed strategy and business plan. In my experience, they bring a perspective that adds to the debate and, in many instances, alert the non-executive directors to issues that would otherwise go under their radar.

4. Widespread acceptance

Although the 5th Company Law Directive and so-called ‘Vredeling Proposal’ were not implemented in Ireland and the UK, other EU member states have implemented their provisions, including the worker director provision, and conflict of interest has not emerged as an issue for their state or private companies.

Conclusion

So, while there are arguments on both sides of this question, my own conclusion is that, on balance, having engaged worker directors on the board is better for the organisation than excluding them.

Prof. Patricia Barker FCA is Adjunct Professor of Accounting at Dublin City University and a former Council member at Chartered Accountants Ireland.