The precedent from having employees’ representatives on the boards of the Employees Provident Fund (EPF) and Social Security Organisation (Socso) has brought about the belief that a more wide-scale placement of union representatives on boards can boost the participation of the working class in government initiatives with a view of pursuing stability, unity and sound industrial relations.
AS antithetical as it may sound, collective agreement is an effective armament to resolve sensitive disagreement.
Indeed, trade unions have long been known to leverage collective agreement as a means to pursue the interests of unionised employees by striking a consensus with employers on fair wages and other working conditions.
It is well established across the globe that unions through their collective voice are critical to protect workers’ rights so much so that union movements have increased lately, driven, in part, by Covid-19 and workers’ desire for increased health and safety practices.
This is further accentuated by the Great Resignation phenomenon whereby companies are catapulted to pay close heed to their employees’ desires or risk a continuous exodus.
In fact, in the current environmental, social and governance era, one of the more discernible social indicators that investors and other stakeholders can deploy to assess companies is the level of trade union engagement as this dimension has a huge compounding effect.
In the famous words of United States’ President Joe Biden during his address in honour of labour unions, “when unions win, workers win – that’s a fact – and families win, community wins, nation wins”.
In Malaysia, trade unions recently received a shot in the arm when our Prime Minister announced that government-linked companies (GLCs) and government-linked investment companies (GLICs) should appoint a representative from the Malaysian Trades Union Congress (MTUC) to their board of directors.
It is the Malaysian government’s hope that this move will enable workers to have a say in decisions made by the board of directors of GLCs and GLICs, particularly on those relating to employee interest.
The precedent from having employees’ representatives on the boards of the Employees Provident Fund (EPF) and Social Security Organisation (Socso) has brought about the belief that a more wide-scale placement of union representatives on boards can boost the participation of the working class in government initiatives with a view of pursuing stability, unity and sound industrial relations.
While the potential value proposition of this reform measure is indubitably compelling from an institutional standpoint, there are various intricacies to navigate in effecting this policy.
It is worth mentioning that the construct of wide-scale workers’ representation on boards is relatively unchartered in jurisdictions with a single-tier board structure like Malaysia as opposed to the tried and tested model in selected European countries that deploy a two-tier board structure (i.e. supervisory board and board of management).
Therefore, it is trite but true that implementation holds the key in determining the success of this reform measure.
As the Malaysian government fashions the implementation mechanism in a consultative manner with the MTUC, GLICs, GLCs and other key stakeholder cohorts, the following considerations should among others be taken into account.
Firstly, there is a need to alleviate concerns that union representatives on boards may be singularly focused on matters concerning employee relations in contrast to the broader scope of responsibilities reposed on board members which include strategy setting as well as oversight on performance, governance and risks.
Capacity building
Hence, capacity building is essential to curate awareness among union representatives on the fiduciary duties assumed by board members and the accompanying wide-ranging responsibilities.
Upskilling is also necessary to ensure that union representatives possess relevant skill sets which would allow them to add palpable value to board deliberations.
To this end, the announced annual training grant of RM4mil by the government to MTUC will certainly come in handy.
Secondly and on a related note, it is likely that most union representatives will be maiden non-executive directors of corporations.
Experience gathered by KPMG Management & Risk Consulting Sdn Bhd from board evaluation engagements has revealed that maiden non-executive directors may find it hard to know the lines in the sand and clearly delineate operational functions from overall oversight responsibilities.
There may also be cases whereby such newly onboarded directors may hastily display exuberances and call for systemic changes.
In this regard, clarifying the roles and expectations of new directors would go a long way in ensuring the effectiveness of the board that is welcoming the union representative.
In fact, establishing an informal mentorship programme for union representatives who are maiden directors, at least for the initial period is highly recommended.
It would also be advisable for newly inducted directors to undertake regular reviews with the board chairman and chief executive officer on their performance and contribution.
Thirdly, the interplay between the nomination by MTUC based on the government’s directive and shareholders’ rights as entrenched in the statutes or constitutions of GLICs and GLCs calls for clarity.
This would particularly be the case if the catchment of union representatives on boards also extends to a GLC which is listed.
A listed GLC is subjected to a gamut of legislative promulgations and the broad base of shareholders in the said company are vested with the rights to elect directors of their choice, unless the company’s constitution contains a provision to the contrary.
An example of such exception would be a provision in the listed GLC’s constitution which allows the Minister of Finance (Inc) to specifically appoint a selected number of directors through the golden share held.
It is thus imperative to ensure that enabling provisions are present in the constitutional documents so as to accommodate the presence of union representatives on their boards without any potential legal ramifications.
In a similar vein, there needs to be clarity on the designation of the union representative on the boards of GLICs and GLCs.
Premised on the fact that union representatives are nominated by the MTUC to represent the interests of a particular stakeholder group, namely workers, one can reasonably argue that they should be classified as non-independent, non-executive independent directors (also known as nominee directors).
As GLICs and GLCs are called upon to have a critical mass of independent directors on their boards by way of the Principles of Good Governance and Malaysian Code on Corporate Governance, respectively, designating union representatives as non-independent directors may affect the mix on the board and accordingly, warrant a revisit in terms of board composition.
Reward aspect
Finally, there is a need to consider the reward aspect of the union representative on the board vis-a-vis the risk assumed by the individual.
While it can be contended that the representative is on the board by virtue of the nominator, it must also be underlined that the individual assumes risks and liabilities on a personal to holder basis.
Therefore, in this context, cue can be taken from the practice deployed by major institutional investors whereby a remuneration sharing arrangement is devised between the institutional investor as the nominator and its employee who acts as a nominee director in the investee company.
All in all, it has become a non-negotiable consideration for workers’ voices to be taken into account when boards of GLC and GLICs make a decision and as such, the government’s policy reform in this regard is certainly timely.
Notwithstanding, a concerted implementation plan is needed to harness the merits of having union representatives on boards while counteracting any potential wrinkles.
Hence, both the policymakers and the concerned stakeholders must act in unison and draw on each other’s collective input to strike it right in terms of action plan.
Kasturi Nathan is head of Board Advisory Services, KPMG in Malaysia. Krishman Varges is director, Board Advisory Services, KPMG Management & Risk Consulting Sdn Bhd. The views expressed here are the writers’ own.
