DealMakers - Q2 2021 (August 2021)
Mandatory appointment of an employee representative to a board of directors
by Vivien Chaplin, Darryl Jago and Mmakgabo Makgabo
The proposal that a company should appoint an employee representative to its board of directors has gained traction in the business community in recent months.
In January 2021, NEDLAC debated this proposal and it was subsequently taken up by a variety of industry bodies. In May 2021, the Department of Trade, Industry and Competition (DTIC), via Minister Patel, indicated that a Bill will be prepared within the following three months to implement the proposal and address worker representation on boards.
Proponents of the proposal argue that employees, as vital stakeholders, should be afforded the opportunity to influence and participate in decision-making at a board level. This concept is broadly in line with the development of corporate governance across the globe, which has moved towards a more inclusive approach, recognising a broader range of stakeholders.
The South African corporate governance framework, comprising primarily of the Companies Act, No. 71 of 2008 (Act) and King Reports on Corporate Governance, has developed in line with international trends. This framework is supplemented by a raft of other legislation, some uniquely crafted to deal with the socio-economic issues associated with South Africa’s past. The principles of diversity, inclusivity and protection of employees are widely entrenched throughout the South African legal landscape.
Accordingly, the Act already contains extensive provisions which seek to recognise employees as key stakeholders. These include the rights of trade unions to restrain a company from pursuing a course of action inconsistent with the Act, requiring that trade unions be informed where substantial financial assistance has been provided to related companies and directors, the requirement to establish a Social and Ethics Committee (SEC) for companies that meet the public interest threshold, and rights afforded to trade unions and employees under business rescue proceedings.
The proposal that employees be represented at board level is arguably an extension of these principles in our company law. The proposal seeks to give more protection to employees, particularly in this time of economic upheaval, and encourage diversity on boards.
There is also global precedent for this proposal. For example, German company law and its corporate governance code creates a framework within which employee representatives can be appointed to a supervisory board and influence executive decisions made at management level. The idea has also been extensively debated in the United Kingdom. Although employees still do not have a right to board representation in the UK, measures have been introduced which require greater engagement by boards with the workforce.
An argument can thus be made that, conceptually, this proposal is supported both by South Africa’s developmental state imperatives and certain other jurisdictions.
However, there are strong counterarguments to the proposal, including:
Whether additional intervention of this nature will result in tangible benefits to the economy and address current social challenges and inequality? Many argue that continued state interventions (such as B-BBEE policy) have had limited success in achieving their stated goals and transforming the economy.
Is it wise to impose further developmental requirements on South African corporates, given the impact of COVID-19 on South Africa’s struggling economy and South Africa’s reputation of over-regulation and policy uncertainty, particularly in an economy hoping to attract foreign investment.
As it stands, many companies are not complying with the existing provisions of the Act relating to employee rights. Given the level of non-compliance, the Companies and Intellectual Property Commission (CIPC) rolled-out a Compliance Checklist in January 2020, requiring companies to declare their compliance with specific mandatory sections of the Act, including compliance with SEC requirements.
In practice, will a lone voice on a board make a difference to the lives and livelihoods of employees? A director generally holds one vote and, on a properly constituted board, is able to be out-voted. Could this not inadvertently create additional potential for employee alienation and discontent?
Furthermore, South African labour is highly unionised, and labour relations are often punctuated with violence when companies do not capitulate to the demands of their employees. There are numerous instances of this having occurred, including the "Marikana Massacre". Whilst some may argue that these developments support the proposal of worker representation, there is no doubt that the election of employee representatives could become a political and fraught process.
Notwithstanding some global support for the proposal, recent developments in the US illustrate a lack of support for the inclusion of employee representation within existing board structures, as such proposals have been made by investor groups but rejected by the boards and shareholders of several companies in the last year, including Starbucks, Disney and Walmart.
From a company law perspective, the concept of a representative director is not a new concept in South Africa. In the seminal case which deals with representative directors in South Africa, Fisheries Development Corporation of SA Ltd v Jorgensen 1980 4 SA 156 (W), the court held that a director is not a servant or agent of the shareholder who procures their appointment to the board. The court further held that although a director may, in fact, be representing the interests of a person who nominated him, in carrying out his duties and functions as director, he is obligated to serve the interests of the company to the exclusion of the interests of his nominating constituency.
There are also other tensions between the proposal and the common law/codified provisions in the Act dealing with directors’ duties. For example,
common law and section 76(2) – an employee representative would be prohibited from sharing any confidential information that they received in their capacity as a director with trade unions or employees;
section 76(3)(b) – an employee representative would be required to support a board decision that is in the best interest of the company, even if not in the best interest of employees; and
section 75 – an employee representative would likely have a personal financial interest in most matters that affect employees and may therefore need to recuse him/herself from a number of decisions.
The proposal would require a number of amendments to the Act, particularly in respect of those companies which do not have an employee shareholding body. In such instance, the employee representative would need to be nominated by a majority of the employees or the representative trade union which may require sections of the Act to be amended. The election process may be particularly complex where there are competing unions. The removal of an employee representative would also need to be considered, particularly whether the existing rights of shareholders to remove directors would apply to such employee representative.
The board composition, method of voting and quorum requirements would also need to be taken into account. For example, would a board meeting be quorate if the employee representative director was absent? Can the employee representative director have an alternate?
In terms of a sanction for non-compliance, commentators have suggested that non-compliance could be a specific ground for a delinquency application. This sanction is not practical, particularly as it is generally shareholders (and not directors) that hold the rights to elect and remove directors under the Act. Such sanction may also deter existing board appointees from remaining on the board, and new appointees from agreeing to an appointment.
More appropriate sanctions may include amplifying the anti-avoidance provisions of the Act to provide courts with powers in relation to shareholders who fail to elect an employee representative to their company’s board. CIPC could monitor and regulate compliance by shareholders using its Compliance Checklist and placing an obligation on directors to provide accurate information to CIPC or run the risk of being guilty of an offence under the Act.
In the context of the practical implications, it is worth considering the following alternatives to the proposal:
maintain the status quo. The Act requires a director to perform their functions and exercise their powers in a way that is in the best interests of the company. If it is in the best interests of the company to consider long term sustainability and the interests of all relevant stakeholders (including the interests of employees), then the proposal is already captured in the Act;
the Bill could rather require companies that achieve a certain public interest score to constitute an employee stakeholder committee (ESC). The ESC would be akin to an SEC, but with a specific focus on employee issues, to guide the board in its decision-making; or
adopt a hybrid model by requiring companies that achieve a certain public interest score to address worker representation by means of options, such as establishing a formal employee panel (such as the ESC) to advise the board of directors on key decisions, be represented in certain committees or create a designated non-executive director role with a focus on employee engagement.
In substance, the proposal for the appointment of an employee representative has merit, but it is debatable if the end sought is best realised by a mandatory requirement which may come at a price for investors in the South African economy. In addition, any amendments to the Act to incorporate these changes require nuanced consideration to guard against unintended consequences and the curtailment of efficient decision-making. It is important that the DTIC ensures that the proposal is properly dealt with in the proposed legislation, as the South African economy can ill afford to get this wrong.
Chaplin is a Director, Jago a Senior Associate, and Makgabo a Candidate Attorney in Corporate & Commercial | Cliffe Dekker Hofmeyr.