At its annual meeting this week, Microsoft shareholders voted on a resolution that seeks to add a rank-and-file employee to its board of directors. Although the resolution was defeated, corporate directors should view this as the start of a campaign to popularize the idea that giving employees a greater say in how a company is run can provide material benefit to the organization and its stakeholders.
News reports revealed that NorthStar Asset Management, a self-described “socially responsible investment firm,” submitted the proposal that only received 5% support. This year, NorthStar submitted resolutions seeking employee representation on the boards of Microsoft and FedEx. The activist investor says that it is preparing similar resolutions that it will introduce at a number of other companies in 2020.
In a statement filed with the SEC, NorthStar contends that this campaign for employee representation was necessitated by Microsoft’s “apparent unresponsiveness to employee concerns.” It also argues that employee representation on boards is generally positive because it could 1) add first-hand operational knowledge to board decision-making; 2) present information about technical efficiencies the company could take advantage of; and 3) “provide employee ‘checks’ on several structural incentives for management opportunism.” Employee representation has worked to some degree in Europe, so expect to hear these arguments repeated in the U.S. next year if more of these types of resolutions are filed.
In the meantime, boards can assess whether they could be a target for NorthStar or any other activist pushing for employee representation on boards. What type of relationship does the company have with its employees? To make a proper assessment, employee engagement will be needed. It is an area companies will need to pay more attention to if they are to attract and retain the best talent. Boards will need to work with management to create systems that monitor and document worker needs, complaints and morale. Companies will also need to determine whether they have set up procedures that can respond adequately to employee issues before they turn into defections, protests or shareholder resolutions.
Boards might avoid the suggestion that employee representation is needed by addressing some of the more obvious issues that have recently resulted in conflicts with employees. Being proactive about upgrading and emphasizing company policies on sexual misconduct, harassment and discrimination, explaining company positions on gender pay equity and articulating a commitment to safe working conditions can mute complaints about boards being non-responsive to employee concerns.
And being proactive does not mean that boards should acquiesce to all stakeholder demands. However, boards do need to formulate strong arguments supporting whatever positions they take on these types of issues and against employee representation that will win over the majority of shareholders.
Since employees have also been lobbying companies to support random political or social movements (such as refusing to do business with the government, and supporting certain environmental concerns), it might be a good idea to designate a team made up of directors and management to anticipate potential employee concerns and suggest possible positions for the board. Teasing out “worst-case-scenarios” involving employees can be useful, especially if this is relatively new ground for board members.
Directors should also note that many shareholder groups are looking to use social issues to gain influence over the board. It might be prudent to survey larger shareholders to determine their views on employee representation on boards. Their comments will let boards know how serious a problem this type of resolution might be in the future and may also provide the board with arguments against the practice that it hadn’t thought of.