Corporate Structure, Company and Employment Law Reform: what will the Labour Party manifesto commit to?

What are the Labour Party’s objectives for corporate governance?

We would summarise these as:

To have a better and fair way to maximise long term value creation and productivity by:

• having large companies governed for the benefit of stakeholders as a whole
• with mandatory and enforceable standards of governance, and
• awarding taxpayer funded contracts to fit and proper companies with acceptable governance.

“When shareholders are looking for quick short-term returns, they encourage companies to cut corners. That means they look to cut wages, instead of investing for the long term, or they spend longer inventing new tax avoidance schemes then they do in inventing new products. By reforming the rules our companies operate under, we can make sure they stay focused on delivering shared wealth. Labour will amend company law so that directors owe a duty directly not only to shareholders, but to employees, customers, the environment and the wider public.” Labour Party manifesto: 2017

What are our views?

Among various of the authors of this article, we take the view that the Labour Party’s plans to extend workers’ rights and reform employment law will politically be very popular with sections of the electorate. They will however have an impact in practice – for example, implementing the shorter working week is a longer term (within 10 years) goal but implementing it in the public sector could nevertheless, unless corrective action is taken, impact the availability of public services, especially in hospitals and care homes. Collectively, the reforms may impact the UK’s reputation, from an employers’ perspective, for flexibility in the labour market.

Whatever your politics, underlying questions around the purpose of companies and investors, their responsibilities (both to society and a much wider range of stakeholders than previously) and questions of how to balance fairness and agility when thinking about workers’ rights and working practices look set to remain high on the political agenda. Labour’s proposals draw focus to questions like:

What is the purpose of a company?

• What are the responsibilities of a company and investors to society?
• How can we ever improve productivity without improving education, diversity and inclusion?
• How can we ever build a fair society when so many 18-25-year olds have never had a job?
• Is it right that a shift worker who arranges childcare cover for their shift can then have their shift cancelled on a few hours’ notice, leaving them without a day’s pay but obliged to pay for child care?

Labour has views on these issues that they believe are rooted in social justice and their view of better long-term outcomes. In the event of a Labour or Labour-led government, those with alternative views will need to engage with their models of governance and employee rights fit for the future.

In our view, these will be politically popular with electorate and are likely to be taken forward in the Labour Party’s 2019 manifesto.

The likelihood of a Labour government is difficult to predict but it is worth reflecting on the proposals and the rationale for them in any event: Wellbeing Economics published an open letter to the Chancellor: Spending Review to Increase Wellbeing which highlights the correlation between wellbeing and productivity. There is a strong correlation between employee engagement and productivity and an increased focus on models of governance which take account of wider stakeholder interests.

What is the Labour Party considering?

The proposals they are considering fall into these four categories:

• alternative forms of ownership
• a stakeholder model of corporate governance
• central enforcement of company law through a new regulator and a statutory framework of corporate governance (replacing the ‘comply or explain’ with ‘comply or else’), and
• an environment, social and governance (ESG) type ‘fit and proper’ test for public procurement.

What does the Labour Party want to achieve by reforming corporate governance?

These are multiple objectives, but broadly these are to:

• encourage long term economic activity
• make the economy more productive
• be more democratic (having the social, cultural and economic voice in decision making)
• promote local forms of ownership
• promote equal and financial security (reducing inequalities in wealth)
• channel local wealth locally
• address the failures of privatisation
• help prevent automation being detrimental to labour, and
• promote alternative ownership of the digital economy and our data for greater public benefit.

What specific changes to corporate governance is the Labour Party considering?

A wide range of measures are identified in papers and publications (but without them being officially adopted Labour Party policy) including having:

• employees, consumers and pension trustees on the Boards of large companies with companies able to choose whether to have
  • a unitary board (with 1/3 stakeholder representatives), or
  • a two-tier board with a supervisory or stakeholder board with equal representation from management and stakeholder representatives, with an independent chair having a casting vote
• directors’ duties to promote the success of a company “for the benefit of its stakeholders as a whole”
• mandatory compliance with the Governance Code and enforceable rights of stakeholders
• a bar on short term voting unless the shares have been held by an identifiable owner for at least 2 years
• a new independent Companies Commission to monitor / enforce company law / corporate governance
• shareholders owning more that 5% of the shares to have the right to ask the court to appoint an expert to report on specific ‘management operations’ (as in France)
• a statutory framework for corporate governance
• prescribed forms of new internal constitutions to be adopted within a specified time frame
• a fit and proper test based on environmental, social and governance (ESG) aspects for the award of all taxpayer funded contracts over £5 million to companies (UK or foreign) based on:
  • human rights
  • paying UK taxes
  • gender discrimination
  • executive pay
  • workers’ pay rates
  • supplier payment performance
  • pension deficits
  • environmental matters
  • other criteria making a company suitable to receive taxpayer funded contracts, and
• an inclusive ownership fund structure (10% of shares in large companies shared among employees, with dividends capped at £500 per employee and the balance paid to the Government).

What are the Labour Party’s proposals for employment law reform?

At the heart of the Labour Party’s policy is Jeremy Corbyn’s promise to “put power in the hands of workers”.

Over the last 12 months, we’ve heard various proposals from the Labour Party to reduce inequality and extend worker rights. Which ones are likely to make it into the 2019 manifesto?

• First, the excessive pay levy. This is a proposed payroll tax levied on employers for paying excessive salaries, with a:
  • 2.5% levy on employers of those earning £330k or more, and
  • 5% on those earning £500k or more.

The levy would be due on total compensation - to reduce the use of incentives to avoid the tax. The UK’s High Pay Centre recently reported that FTSE 100 CEO pay is, on average, 117 times that of the median employee. There are even CEO pay ratios of 1:1000. As Jeremy Corbyn sees it, work is a collective endeavour and, as such, proceeds should be shared more equitably. There is a lack of clarity on the details of policy and its potential scope, but the rationale for it seems to be popular with voters. Further, as the Labour Party estimates the levy could raise £1.3bn, it is likely to find its way into the 2019 manifesto.

• Next a proposal to roll out maximum pay ratios of 20:1 in the public sector and in companies bidding for government contracts. Jeremy Corbyn shied away from setting a maximum wage for executives at companies with government contracts This proposal would heavily impact pay of public sector outsourcing companies, some of whom have CEOs earning over £2.5m per year. Again, it is not yet clear how the ratio requirement would be measured e.g. would it only apply to company’s subject to the new CEO pay ratio reporting requirement, or would it also apply to smaller firms and professional services partnerships not currently in scope? These proposals could present a significant barrier to bidding for government work, but it is unclear whether there is support for this idea even within the Labour Party; it has been referred to as “a proposal rather than a policy” by one shadow cabinet minister. We do not think concrete commitments will be made to this in the Labour Party 2019 manifesto.
• The Labour Party plans to make it easier for trade unions to organise, including a right for unions to access workplaces, plus less onerous rules on ballots on issues such as industrial action. Jeremy Corbyn would repeal the Trade Union Act 2016 and expand sectoral collective bargaining, to enable unions to negotiate minimum workers’ rights across a whole sector. This commitment to reform trade union powers is likely to feature in the 2019 manifesto.
• A Labour government would also create a new Workers' Protection Agency and a new Ministry of Employment Rights to enforce employment laws and standards with:
  • powers to inspect workplaces
  • rights to litigate on workers' behalf, and
  • power to issue penalties.

Protection of employment rights is a key feature of Labour’s proposals and it seems likely that they would, if elected, proceed with this proposal.

Future employment law reform

“The next Labour government will bring about the biggest extension of rights for workers that our country has ever seen” says Jeremy Corbyn

In addition to the above, the Labour Party proposes to extend the rights (currently granted to employees), to workers, and to enhance the rights for all, including:

• a commitment to reduce maximum weekly working hours to 32 and to introduce four new bank holidays
• a commitment to double paternity leave (which is currently 2 weeks) to 4 weeks’ paid leave
• a proposal to enhance maternity pay (potentially to 12 months’ pay) and extend paternity pay
• a proposal to extend statutory sick pay to workers
• a proposal to raise the level of the minimum wage to £10 to the level of the living wage
• a proposal to extend the right to request flexible working (and to place a duty on employer to consider and accommodate the request), a plan to break the stigma of menopause at work with an obligation for large employers to introduce a menopause workplace policy to allow which would permit requests for flexible work, and
• a proposal to ban zero hours contracts by requiring employers to give all workers a contract that specifies their hours.

We consider that a commitment to introduce many of these employment law reforms will feature in the Labour Party 2019 manifesto.