Interview with the Engagement Team - Employee Board Representation

"In our 2022 Engagement report, we offered a case study describing how we begin a topical campaign. In this example, we asked, “Should shareholders encourage employee representation on the Boards of the companies they own?” 

 

Cemre, why an engagement campaign for employee Board representation?

Human capital-related issues are rising for companies. It is increasingly important for many reasons, including the long-term financial success of the company, that the interests and views of workers are incorporated into corporate strategies. We launched this direct engagement campaignin 2022 both to understand more about employee representation on Boards, and to demonstrate its significance to companies. Ultimately, we hope to reflect this position in our future voting guidelines.

Like many investors, we believe that corporate governance which includes meaningful employee input contributes to fair wages, investment in human capital management and pay equity. Research also suggests that among other things, employee input improves capital formation, increases labour productivity, reduces turnover, and generates more wealth.

 

How were issuers selected?

The target issuers were selected based on the number of representatives serving on the Board, the maximum tenure and the gender diversity among the employee representatives serving. We wanted to understand which elements are considered during the nomination process, to what extent the employee representatives serving on the Board currently reflect the demographics of the employees, and the channels of communication between employee- directors, non-employee directors and the workforce.

We also contacted nine trade unions in the countries where the selected issuers are incorporated, as well as the European Trade Union Confederation. Our goal is to understand the different approaches – and views -- from the union side, and to investigate whether harmonization on this theme could be an idea for the European Union. Unfortunately, and rather surprisingly, we have not received any responses from the unions.

 

How are you handling the increase in Reporting Requirements?

Demands for more detailed communication and reporting are pouring in daily from regulators, clients, society… of course from our internal stakeholders themselves! These requests are legitimate, and transparent reporting is part of Candriam’s Responsibility.

Providing more detailed reporting requires systems. At Candriam, our ESG team has a proprietary database for the coordination and monitoring of engagement activities. Our database is integrated with Candriam’s systems for holdings, and also fed by the inputs of ESG analysts and our investment teams. We track engagement history for every issuer, including details of votes and related rationales; details of every engagement such as trigger, objectives, topics, milestones, related levels of achievement, expected timeline; and the impact of the engagement on our ESG opinion and investments.   

Inputting these details requires a conscientious team. But it pays off in a better organisation, and better information to allocate our finite resources. This year it helped us to provide a more precise view of the linkage between engagement and frameworks, specifically the UN Sustainable Development Goals and SFDR Principal Adverse Impacts, which was a strong reporting demand from all of our stakeholders.

 

What have you discovered?

So far, we have encountered three themes..

  • There is no harmonization of the rules regulating employee representation. Some countries with a longer history of unions are more familiar with employee representation on the Board. Even the best of the existing regulations do not reflect the rapid globalization and diverse workforces of we are seeing today.

    Where regulated, employee Board representation is mainly required from the country where the company is incorporated, limiting the information which might be supplied by employees around the world.

  • More transparent disclosure is needed on the communication channels used between the employee representatives and the wider workforce, especially for employees based outside of the main corporate domicile. Given that employee Board representatives are mainly appointed by unions and employees in the country of incorporation, the question arises of how, and whether, issues of employees from other regions are reflected in the Board discussions.
  • As local laws prohibit company involvement in employee representation elections, companies tend to be silent on the topic. This could be interpreted as the company being unhelpful in promoting participation in these elections. Or perhaps some managements simply fear that any public communication from them could be misinterpreted as
  • Except where gender diversity is required by law, the proportion of women employee representatives tends to fall below our preferred guidelines (33% diversity for European companies). Generally, this representation understates the gender diversity of the firm’s overall workforce.

 

What new questions have arisen?

What is the tenure of employee representatives, and does it affect objective ability to raise questions in Board meetings?. Without consistent approaches, obviously there are no rotation rules for the independence of the employee representatives. We consider regular Board members to be no longer independent after 12 years. At what point should employee representatives serving on the Board be considered as affiliated with the management and/or shareholders?

The responses from companies as well as from the employee representatives can be grouped under two approaches. One group believes that long-term tenure provides employee Board representatives with sufficient confidence to raise their opinions in Board discussions. The other group shares our concern that an overall rotation rule should be introduced by the regulators.

The most common response from managements to the value-added question was that employee representatives do bring perspective to the discussions. For instance, when the discussion is too high-level, employee representatives with field knowledge can ground the topic and provide the members with technical background and feasibility. And in committee work, the employee perspective can be of significant value for conversations around executive remuneration, nomination and sustainability.

 

What are the next steps?

During the first phase of the engagement, we realized that some changes can only be accomplished through national and even local regulation and collaboration with regional unions. Given the lack of response from the national unions we contacted, a more local approach is necessary to invite the appropriate contacts to the discussions.

Our next phase will include engaging with regulators and unions to understand whether European harmonization is possible, and the approach it might take, to maximize the benefits of employee Board representation.

 

  • Cemre Aksu
    ESG Analyst, Governance Specialist Voting and Engagement

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