Theresa May’s plan to put workers on boards is borrowed from Germany and France

May, who supported keeping the UK in the EU but will now be in charge of overseeing its departure, vowed to crack down on the excesses of big business, including executive pay

Theresa May will step into number 10 on Wednesday (AFP/Getty)

The UK may have voted to leave the European Union, but if its next prime minister gets her way, its companies might look a little more like those in EU countries such as Germany or France.

Theresa May, who is set to become prime minister after her only rival quit the race, on Monday pledged an overhaul of corporate governance, including appointing employee representatives to boards.

The move would bring the UK closer to the system in Germany, where the labour side makes up half of corporate supervisory boards.

May, who supported keeping the UK in the EU but will now be in charge of overseeing its departure, vowed to crack down on the excesses of big business, including executive pay.

In doing so, she marked a radical departure from the policies of the UK’s last female prime minister, Margaret Thatcher.

“Thatcher broke the unions,” said Ingo Speich, a fund manager at Union Investment in Frankfurt.

“When you bring them to the board, even as non-executive directors, it’s a clear signal to the markets that things are changing.”

In her first major speech on the economy, May outlined her vision for British business, calling for an industrial strategy that would defend important sectors from foreign takeovers — a policy often associated with France rather than the traditionally more free-market UK.

She singled out Pfizer’s unsuccessful bid to take over AstraZeneca two years ago as an example of what she had in mind.

May indirectly criticised George Osborne, the chancellor of the exchequer, when she said not enough had been done in recent years to bring about “deep economic reform.”

Her proposal to add employee representatives to company boards goes further than the opposition Labour Party’s 2015 election manifesto, which called for employee representation on corporate compensation committees.

“I want to see changes in the way that big business is governed. The people who run big businesses are supposed to be accountable to outsiders,” May said. “In practice, they are drawn from the same narrow social and professional circles as the executive team.”

Her speech on Monday didn’t spell out how many employees would be added to boards or how they would be selected.

“How’s this going to work?” said Alex Flynn, spokesman for Unite, the UK’s biggest trade union.

“If there are going to be employee representatives, they need to be democratically chosen and appointed by a recognised trade union. At companies where there isn’t trade-union representation, there needs to be a dialogue between workers and management.”

May’s proposal would likely fall short of Germany’s system, which requires half the seats on supervisory boards to be given to officials of unions or works councils.

The other side represents shareholders and the chairman often casts a deciding vote on the supervisory board, which makes strategic decisions while a separate board handles day-to-day management.

“It looks more like Germany but we have a different structure,” Speich said. “I don’t see any big disadvantages between the German or UK system, but when you change the structure significantly or bring them together you should think in detail, because they took decades to develop.”

May’s proposal on executive pay goes beyond the government’s 2013 rule changes, which gave shareholders a binding vote every three years on compensation policies in addition to an advisory vote on actual pay every year.

May said she wanted votes on pay to be binding as a way of confronting rising income inequality.

“There is an irrational, unhealthy and growing gap between what these companies pay their workers and what they pay their bosses,” May said.

She called for full disclosure of bonus targets and the publication of data showing CEO compensation as a multiple of a company’s average pay.

Investors broadly supported May’s proposal on pay, saying this could make shareholders take the issue more seriously at annual meetings.

“I’ve been in favour of moving toward binding votes,” said Nigel Wilson, chief executive of Legal & General. “That way people will participate with greater conviction and there will be increased communication between investors and boards.”

This spring there was a widespread investor backlash against UK executives’ pay as an increasing percentage of shareholders voted against large compensation packages.

Almost 60 per cent of investors at BP voted against CEO Bob Dudley’s compensation total of £14 million for 2015, while about 33 per cent at advertising company WPP gave a thumbs-down to CEO Martin Sorrell’s £70 million package.

Still, most executive pay deals were approved by a majority of shareholders.

Some investors questioned how binding votes on pay, rather than just compensation policies, would work in practice.

“It’s not straightforward,” said Paul Lee, head of corporate governance at Aberdeen Asset Management.

“There isn’t scope under UK law to take money back from directors. Either you don’t pay out the money until after the shareholder vote, which is quite a constraint, or the binding vote results in more of a conversation, which we have already but maybe we can make it more forceful.”

© 2016 Bloomberg