The obstacles to worker directors on boards are so great as to make itunworkable

The General Secretary of Irish Bankers Officials Association, Mr Larry Broderick, recently called for bank employees to be appointed to the boards of the two main banks, AIB and Bank of Ireland.

First, to get the facts straight. Both AIB and Bank of Ireland currently have directors who are employees on their boards.

AIB has four executive directors and Bank of Ireland three. Although Mr Broderick does not make it clear, I assume these employee directors are not what he had in mind. More likely (but again this is not 100 per cent clear from his press release) he has in mind election by other workers (a common method of appointing worker directors) who would (in Mr Broderick's words) "ensure that the voices of staff are listened to".

All of this begs the question: should workers be directors? Before answering this we first have to establish to whom does a director owe his duty? Many directors do not fully appreciate the answer to this question. They erroneously think directors owe a duty to shareholders, whereas under law their duty is owed to the company of which they are director. In 99 per cent of cases, this distinction is not important. Doing a good job for the shareholders will also be good for the company. But some of the recent accounting scandals in the US were driven by directors who had an excessive shareholder focus and who took decisions that were "good" for the share price but not for the company.

This was particularly the case where directors held large amounts of share options whose value was determined by prevailing share prices. This misconception may also apply where directors have an excessively short-term focus (eg, driven by market pressures continually to release good news (on a quarterly basis in the US).

These corporate behaviours, where directors put shareholders and share prices ahead of the firm's good, highlight the importance of clarity in understanding that directors owe their duty first and foremost to the company.

In the case of worker directors elected by staff, their central interest would in many cases be that of the employees who elected them, which would not necessarily be consistent with the legal requirement of directors owing their fiduciary duty to the company.

Similar to the shareholder analogy, the interests of employees and of the company in many cases will be the same, but this may not always be the case. Is it possible for worker directors, particularly those who are active trade unionists, those who are elected to their position by other workers, to put the good of the company ahead of the good of the particular group of stakeholders they represent?

Where companies have worker directors, such directors should ideally serve as individuals and not as representatives of interest groups. This can be difficult, especially where worker directors wish to be re-elected. In such matters, perception is important. It is not enough to say that worker directors would act primarily in the best interest of the company, when the manner of their appointment to the board creates the widespread perception that they owe their primary accountability to their electorate.

Another important consideration in best corporate governance practice is conflict of interest. Conflict of interest can be defined as any financial or other interest that conflicts with the service of an individual because it could :

impair the individual's objectivity, or

create an unfair competitive advantage for any person or organisation.

I believe the conflicts of interest for a worker director are so systematic as to completely undermine their ability to carry out their duties as directors. In the case of worker directors, there is hardly an issue discussed at board meetings where there would not a conflict of interest (real or apparent) between the personal accountability of the worker director to his/her electorate and the issues considered at board meetings.

For example, it could be argued that boards with worker directors have an inherent conflict of interest, as directors on such boards could hire and fire the workers that elect them.

Boards (broadly speaking) have two functions: first to direct company strategy and second accountability. Boards have the power of hiring and firing the chief executive - the ultimate test of accountability. How can a chief executive operate on a board with worker directors with this power? There are many other board functions would be difficult for a worker director to carry out - agreeing the remuneration of senior management comes to mind.

Worker directors are widespread across Europe. But systems of board-level employee representation vary widely from country to country and may not be suitable for Irish boards. Compared with our single board system, many European countries have two-tiered boards (a supervisory board and a management board). Such a board structure may be more conducive to the successful participation of workers at board level. In many countries (including Ireland) worker directors are limited or restricted to the public sector and few countries extend provisions for worker directors into the private sector. Public sector boards in some cases are more restricted in their powers and functions than plc boards, which restrictions may make the appointment of worker directors more tenable.

Thus, for the multitude of reasons offered above, in my opinion the obstacles to the successful participation of worker directors on boards are so great as to suggest that Mr Broderick's call for worker directors on AIB and Bank of Ireland (or any other plc!) is unworkable.

Niamh Brennan is Michael MacCormac Professor of Management at UCD and is Academic Director of the Institute of Directors Centre for Corporate Governance at UCD