Introduction
The employee’s right to be represented on the Board of Directors (“BoD”) is governed in the Limited Liability Companies Act (Nw: aksjeloven) and the Public Limited Liability Companies Act (Nw: allmennaksjeloven). We will in the following refer to the Limited Liability Companies Act (“the Companies Act”), as the wording is the same. The provisions are the basis for the right of employee representation on the board of directors through direct election by and among the employees.
Section 6-4 of the Company Act distinguishes between the following two situations; i) where the employees may elect employee representatives and ii) where the employees shall elect employee representatives. Whether the employees may or shall elect depends on the number of employees in the company.
The rules concerning the implementation of the employee representatives are laid down in the regulation regarding employees’ right to representation on the board and corporate assemblies of private and public limited liability companies (“the Employee Representation Regulation”) (Nw: “representasjonsforskriften“).
Board representation requirements
The distinction between situations where the employees may elect employee representatives and where the employees shall elect employee representatives, will as mentioned above depend on the number of employees in the company.
In companies with more than 200 employees, and where it has been agreed that the company shall not have a corporate assembly, the employees shall elect employee representatives. In other words: If the company has more than 200 employees, the company has an independent obligation to ensure that the employees are represented according to the rule in Section 6-4 (3) of the Companies Act.
The rights and obligations of an employee representative
The employee representatives on the BoD will have the same rights and obligations as all other members of the board of directors. The responsibility of all board members, regardless of how they are elected, is to attend to the company’s interest in the best way possible. This implies that the role as a board member is an entirely different one compared to the role as a union representative or employee representative.
The employee representatives may on the other hand provide a somewhat different focus than the other board members and may also contribute constructively with their inside knowledge of the business.
From a practical point of view, having employee-elected board members will often mean that the board meetings become somewhat more formal (in particular compared to what is often seen for boards of wholly-owned subsidiaries) and will usually require an increased focus on the rules and procedures set out in the Companies Act and in the instruction to the board, which is mandatory for companies with employee-elected board members.
If the shareholder-elected board members have a majority, which is the norm, the employee-elected board members will hold a lesser share of voting power or actual influence in the decision-making. However, if there are fractions within the group of shareholder-elected board members, the employee-elected board members might in reality have a greater share of influence.
The most practical choice for companies with more than 200 employees is in our opinion for the employees to appoint 3 board members with corresponding deputy members, to achieve the maximum number of full-fledged board members. In companies with more than 200 employees and 3 employee-elected board members, the number of shareholder-elected board members must be 4 to retain a majority on the board (4 out of a total of 7 board members).
Potential consequences of not having employee board-level representation in companies with more than 200 employees
Potential Legal consequences:
- Violation of the Companies Act
When a company has more than 200 employees, the company has an independent obligation to ensure that the employees are represented according to the rule in Section 6- 4 (3) of the Companies Act. A failure to comply with employees’ rights according to Section 6-4 (3) constitutes a violation of the rules, regardless of whether the employees have requested representation or not.
To our knowledge, there has not been any examples on cases before the courts where the board/and or the general manager being held liable for violating Section 6-4 (3) of the Companies Act. However, there is a theoretical risk that violation of Section 6-4 (3) of the Companies Act may result in the directors of the board and/or the general manager being held liable for any loss incurred as a result of not having an employee board-level representative in the board, cf. Section 17-1 of the Companies Act. The claimant can recover damages only if the loss is caused by the breach of the Companies Act.
There is also a theoretical risk that a violation of the Companies Act may result in penalties (or in theory imprisonment, although the risk for imprisonment for this type of violation is in our opinion almost non-existent), or liability for any damages, cf. Section 19-1. The risk for penalties will in our opinion be higher if the employees have put forward a request for representation, and this request has been dismissed by the company. On the other hand, it is our understanding that there cannot be any liability for the company’s management if the employees do not wish for elections to be held or if no one wants to stand as candidates. This presupposes that the company’s management has made reasonable efforts to establish correct board representation.
- Duty of Care and Fiduciary Responsibility
The absence of employee representatives might be construed as a failure to fulfil this duty by not ensuring that a broad range of perspectives, including those of employees, are considered in strategic decision-making.
Potential reputational consequences:
- Social responsibility and sustainability
Many stakeholders, including investors, consumers, and regulators, are increasingly focused on companies’ social responsibility and sustainability practices. Having employee Page 3 of 5 representatives on the board can demonstrate a company’s commitment to responsible business practices and ethical decision-making.
- Employee engagement and morale
The absence of employee representatives can lead to a perception of employees being excluded from critical decisions. Conversely, having employees represented at the board level can enhance trust and alignment among the workforces.
- Decision legitimacy
Including employee representatives in the boardroom enhances the legitimacy of decisions. It demonstrates a commitment to transparency and inclusivity, which can contribute to building a positive corporate image among stakeholders, including employees, shareholders, and the public.
- Lack of diverse perspectives
Employee representatives on the board bring diverse perspectives that can enrich discussions and decision-making. Their direct insights into workplace dynamics, employee concerns, and operational challenges can lead to more holistic and informed choices.
The election process
The election of employee representatives is managed by an election committee (Nw: “valgstyre“), which is to be formally established by the company in collaboration with the employee representatives.
The election committee shall consist of at least 3 employees eligible of voting, of which the employees and the management shall elect at least 1 representative each. The election must be anonymous and in writing, but the voting can be done electronically.
The election of employee representatives shall take place every second year. The period is calculated from the election date and runs until the end of the annual general meeting the year the election period expires. If the employees have not elected a new representative by the end of the two-year period, the employee representatives in place will function as employee representatives until a new election has taken place.
Length of service
An employee has both the right and the obligation to a two-year period of service as employee representative, unless he or she resigns from his/her position in the company, or alternatively in the event of special circumstances or the employee representative wishes to resign from the positions as the employee representative. If an employee resigns, an observer or deputy representative will take the place as employee representative in the elective period (the two-year period).
SVW assistance
We regularly assist companies when carrying out an election process. We normally act as advisors to the election board, guiding the election board through the election process. Our advice typically consists of:
- Coaching the election board on their role and what to do
- Drafting of necessary notices and information to the employees
- Answering questions that might come from the employees during the election process
- Response to questions from the election board
We also offer training of new employee representatives to ensure that they understand their role as board members.
Do not hesitate to contact Simonsen Vogt Wiig`s employment law team should you require our assistance.