Governance Processes, Labour Management Partnership and Employee Voice in the Construction of Heathrow Terminal 5
Simon Deakin and Aristea Koukiadaki
Abstract
The Major Projects Agreement (MPA) is a framework collective agreement designed to enhance performance outcomes in large mechanical and electrical engineering projects. It includes the trade union as a partner in strategic, organizational and employment decisions. The agreement was recently implemented in the construction of Heathrow Terminal 5 (T5). We look at factors in the corporate governance and industrial relations environment that led to the use of the MPA at T5, and assess its contribution to the completion of the construction project there. That the MPA has not been more widely adopted since the completion of T5 is indicative, we suggest, of wider constraints on labour-management partnerships in Britain.
Keywords: corporate governance, labour-management relations, information and consultation, multi-employer environment, stakeholder theory.
1. Introduction
In common with other developed countries, the UK has experienced a weakening of the collective basis for industrial relations, as indicated by a steep fall in the proportion of employees covered by collective agreements, declining union membership rates, and contraction in the scope of bargaining.[1] This has been matched by a strengthening of shareholder pressure for higher and more consistent returns on investments.[2] Against this background, the emergence and successful operation of labour-management arrangements that embody an active role for the trade unions has been rendered much more challenging. This paper looks a recent case of labour-management partnership, namely the construction of the Terminal 5 building (‘T5’) at London’s Heathrow Airport. T5 took around 20 years to plan and build and started operations in March 2008, six years after construction started. Its opening was marked by confusion and controversy, a point to which we return below. As a construction project, however, T5 was highly successful. It was based on a novel approach to risk-sharing between client and suppliers, and it incorporated innovative mechanisms for deliberation between unions and management under the auspices of the Major Projects Agreement (‘MPA’), a framework collective agreement designed to enhance performance outcomes in large-scale engineering projects. According to the parties to the agreement and to an independent audit report, these arrangements contributed positively to a number of project outcomes, above all the completion of the construction work on time and on budget, an above-industry average health and safety record, and minimal time lost to industrial disputes. Despite this positive assessment, the future for the MPA is uncertain as it has not been adopted as a model for new construction projects at Heathrow or for the 2012 London Olympics.
This paper examines the operation of the MPA at T5 and considers its wider relevance for industrial relations practice and labour law policy on employee representation. Section 2 briefly surveys relevant literature on the relationship between corporate governance, industrial relations and the legal framework in the UK, and considers how far these factors might inhibit or encourage the emergence of labour-management partnerships. Section 3 provides an account of the contractual arrangements which were put in place at T5 and an assessment of the way they operated in practice. Section 4 consists of an assessment and conclusion.
2. The corporate governance and industrial relationsframework for labour-management partnerships in Britain
It has been suggested that the corporate governance system constrains the scope for enduring labour-management partnerships in the British context.[3] Core institutions, in particular those relating to takeover regulation and board structure, are seen as strongly orientated towards a norm of shareholder primacy.[4] The City Code on Takeovers and Mergers[5] underpins a market for corporate control in which managerial under-performance leads to shareholder exit and consequent changes in ownership and control. Thanks to these pressures and to executive remuneration arrangements which link pay to financial performance, senior managers have largely internalized the goal of maximising shareholder returns.[6] In this environment, it has been difficult for British firms to build enduring ‘partnership arrangements’ with their workforces.[7] In contrast to the situation in coordinated market economies such as those in continental Europe or east Asia,[8] large scale firms in Anglo-Saxon economies that are in distress are likely to reduce labour costs in order to preserve profitability; it is on this basis that firms are able to secure continuing access to capital markets, retain credit ratings, and defend themselves against takeovers.[9] Waves of restructuring in British firms since the early 1980s, as in the United States, have undermined the ‘implicit contracts’ which once provided for job security and long-term career progression.[10]
At the same time, scope remains for managers to respond to shareholder pressures in creative ways which reflect the need to engage with a wider range of constituencies, including employees. According to Pendleton and Gospel,[11] the development of channels for the exchange of information and exercise of influence between major investors and managers of large firms has given the latter some autonomy to devise labour-management strategies as they see fit.[12] Deakin et al.[13] examined the evolution of labour-management partnerships in the utilities and manufacturing during the 1990s and early 2000s, finding evidence thatenduring and proactive partnerships could develop, in conditions where management was able convince shareholders of the long-term gains from this approach, and where regulatory factors operated to extend the time-horizon for financial returns. In particular, they found that regulation of product and service quality, of the kind observed in most utility sectors and in certain parts of manufacturing and services, favoured the emergence of stable partnerships. This is because, in these markets, profitability was linked to the ability of companies to maintain a high and consistent quality of products and services for end users. However, when such conditions were absent, partnership arrangements were found to be vulnerable to shareholder pressure for short-term returns of the kind which could be generated by asset sales and related restructurings. Under these circumstances, partnership arrangements proved fragile, no matter how much goodwill had previously been invested in them by management and labour.[14]
While, in the studies just referred to, it is assumed that corporate governance impacts on industrial relations and the employment relationship, it is also possible that the labour law and industrial relations framework couldinfluence management’s options and thereby shape, in turn, certain corporate governance variables, such as the ownership structure of the firm.[15] In principle, then, causal influences could run in both directions.[16] In practice, mechanisms for the expression of employee voice are only weakly institutionalised in the British context, so that few constraints would seem to be imposed on the pursuit by management of a shareholder-orientated agenda. There is no legal provision for codetermination of the kind found in most continental European countries;[17] the predominant form of collective employee representation in Britainremains collective bargaining between employers and trade unions. Collective bargaining has traditionally been confined to wages, hours and other terms and conditions of employment, and has not extended to core areas of managerial ‘prerogative’.[18] When, in the mid-1990s, an explicitly collaborative concept of ‘partnership at work’ began to be adopted by parts of the British trade union movement, by government and by some employers,[19] it was without reference to any specific legal underpinning. Partly as a result,there was no generally accepted definition of what was meant by workplace partnership.[20] In general terms, the partnership model resembled elements of a codetermination-based approach, in that employees and their representatives were encouraged to add value to the firm by participating in decision making processes, in return for acquiring rights and influence over the distribution of the firm’s surplus.[21] Trade union enthusiasm for partnership was based on the understanding that unions would be fully involved in this process. However, their view was not fully shared by either government or employers.[22] From 2004, legislation in the form of the Information and Consultation of Employees Regulations (‘ICER’)[23] came into force requiring employers above a certain size to have information and consultation mechanisms in place. However, despite its origins in a European Union directive,[24]ICER does not mandate continental European-style works councils or enterprise committees, and, indeed, leaves it open for managers and unions to continue with the single-channel model of collective bargaining where they see it as in their interests to do so.[25] Thus while codetermination on the continent is supported, in varying degrees in different countries, by legal and constitutional guarantees of worker voice,[26] British-style ‘partnership’ remains a highly contested and contingent concept.
A further factor undermining labour-management partnerships has been the fragmentation of enterprise structures. In the context of large multi-firm projects it has become common for workers employed by different organizations, or by agencies, to work alongside each other at the same workplace, often employed on different terms and conditions, leading to a blurring of organizational boundaries.[27] Opportunities for worker voice are limited ‘in contexts where work and (sometimes workers) is transferred to new employers, where organisational boundaries are blurred and work is fragmented’.[28] The representative structures put in place under ICER, as in the case of other information and consultation laws,[29] are designed for single-employer units, and cannot be straightforwardly adapted to workplaces where subcontracting and the use of agency and self-employed labour are the norm.
If, in general, the conditions for enduring labour-management partnerships appear to be only weakly met in the British context, multi-firm construction projects such as T5 look like even more unlikely candidates for partnership-type arrangements. This, at least, is the conventional picture. The experience of T5 suggests, however, that this is not an inevitable outcome. As it will be seen, the structures put in place at T5 challenge conventional understandings of what partnership can achieve in the UK context, as well as calling into question the single-employer focus of recent legal attempts to encourage employee voice.
In what follows, we present an account of T5 as an instrumental case study in the sense described by Stake,[30] that is to say, one which focuses on a particular case with a view to the examination of a wider set of related issues. In such an approach, the specific case reveals knowledge concerning wider phenomena of interest, which may not be confined to the case itself. We draw on evidence on the establishment, operation and impact of the MPA and related agreements in the form of in-depth, semi-structured interviews with managers at BAA and some of the construction and engineering companies involved in T5, along with employer and employee representatives who took part in the processes set up under the MPA.[31] We also make use of public statements of the principal employers’ associations, trade unions and BAA, and published audit reports conducted by the independent consultant Baker Mallett for the parties to the MPA.
3. T5: A unique project?
3.1 The background to T5: corporate governance at BAA and the framework of collective bargaining in the electrical and mechanical trades
The T5 project started during a period in which the owner of Heathrow Airport, BAA plc, was a listed company. BAA’s governance arrangements, as a regulated utility, are complex, and evolved further in the course of the T5’s construction. BAA was established by the passing of the Airports Authority Act 1986, to take responsibility for four state-owned airports. Prior to 1986, national or local government bodies owned and operated the majority of UK airports and provided the finance for their development.The 1986 Act commercialized 16 local authority owned airports and transformed the British Airports Authority from a government-owned corporation into BAA plc. The Act also introduced economic regulation of airport charges, principally to protect the airlines from monopoly charging behaviour by the airports. The three main London airports – Heathrow, Gatwick and Stansted – and Manchester airport were subjected to price caps on landing charges by the Civil Aviation Authority (CAA). In February 2006, BAA was approached by GroupoFerrovial, a leading partner in a consortium, which declared an interest in acquiring it. In June 2006, Ferrovial took control of BAA after gaining 83% of its shares. In August, BAA was de-listed from the London Stock Exchange, where it had previously been part of the FTSE100 index, and itwas subsequently converted into a private company (BAA Ltd.). The takeover by Ferrovial did not affect BAA’s status as a regulated utility. However, we shall see below, BAA’s transformation from a state-owned enterprise to a regulated utility and listed plc which was then taken over in a bid funded by debt,was relevant, at each stage, to its approach to the T5 project.
It is also relevant to consider the nature of industrial relations in construction. The construction industry consists of around 168,000 firms; directly employed and self-employed workers bring the employment pool to just fewer than 2 million employees working in construction in a multitude of roles, 1.2 million of whom are directly employed.[32] The sector has not, in recent years, enjoyed a reputation for harmonious industrial relations. On the contrary, it has been associated with casualization of employment, use of agency labour and ‘fake’ self-employment, a comparatively high level of labour disputes, declining coverage of collective agreements, a dilution of training, a relatively poor health and safety record, and a low level of awareness of equality and diversity issues.[33] By contrast to construction, electrical contracting is a sector in which multi-employer national bargaining has remained relatively strong. It is distinctive both in the scope of application of its agreements and in the standards that it sets and there has been continuity of support for the collective agreement and for the Joint Industry Board (JIB).[34] The JIB regulates and controls employment and productive capacity, the level of skill, and wages and benefits of persons employed in the industry. This relatively stable industrial relations background played a critical role in the emergence of the labour-management partnership at T5.
3.2 Inter-firm contracting: the T5 Agreement
The construction of T5 is an example of a ‘megaproject’[35] because of its scale, complexity and high cost. The project was broken down into 18 major projects and 147 subprojects. Construction commenced in September 2002; phase one of the project was completed in March 2008.[36] At any one time the project employed up to 8,000 workers, and as many as 60,000 people were involved in the project over its lifetime. Its goal was to increase the airport’s capacity from 67 million to 95 million passengers a year. To achieve its objectives, BAA implemented a long-term strategy aimed at enhancing both its own capabilities and those of its suppliers.[37]
BAA’s CEO in the mid-to-late 1990s, Sir John Egan, was instrumental in reassessing the way that large-scale construction projects were delivered. In 1998, under his chairmanship, the Construction Task Force – set up by the Government – published a report, Rethinking Construction. At the heart of the reportwas the idea that an integrated project process would deliver the best value to the client and user.[38] Under Egan’s guidance, BAA’s senior management began applying the principles laid out in the report to improve project processes. In this context, a new process for organizing projects in BAA’s capital investment programme, promoting integrated team working and a set of framework agreements to achieve more accurate project costs, to implement best practice and to work with suppliers in longer-term partnerships, was developed.[39]
Partly because the planning process for T5 was protracted, BAA had the opportunity to draw on the experience of other construction projects. In the case of the construction of the new Wembley football stadium and the extension of the Jubilee line on the London underground, legal costs arising from disputes with subcontractors had formed a substantial proportion of budget overruns. The clients had apparently been protected against the consequence of delays by contractual clauses under which suppliers were liable to pay liquidated damages for late completion. In practice, there had been bankruptcies among suppliers forced to absorb these costs, throwing the risk back on to the clients.[40]
BAA saw itself as particularly vulnerable to the risks arising from late completion. When the project began in March 2002, senior managers recognised that as ‘a leading company on the FTSE 100 share index [it was] subject to intense scrutiny by its shareholders and city analysts’.[41] The budget for the project, £4.3 billion, was equivalent to two thirds of the company’s then capital value.[42] In addition, the regulator was in a position to withhold phased increases in BAA’s landing charges if milestones for the construction of T5 were not met.[43] In short, the T5 project ‘represented not only an unprecedented and massive expansion of the world’s busiest international airport but also a risk to the very viability of BAA’.[44]