Consultation launched on governance code for private companies

14/06/2018

Following the collapse of BHS, the Financial Reporting Council (FRC) has published a consultation on six corporate governance principles for private companies to follow. Here we look at what this means, why it is necessary and how it could impact businesses.

What is corporate governance?

Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled.

It essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Until now corporate governance efforts in the UK have focused on publicly listed companies.

But private companies constitute a vast portion of the UK economy, and their actions can have a significant impact on their stakeholders too.

This potential impact led the government to consider legislation that would require private companies of a significant size to state in their directors’ reports whether and how they follow a code of corporate governance.

The Principles and guidance set out in the consultation document are intended to help such large private companies comply with that legislation.

Big private firms will be encouraged to follow the six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis.

Why is it necessary?

The corporate governance for large private companies is intended to improve transparency and accountability in the wake of scandals such as the BHS collapse.

It is hoped that the principles will encourage all businesses, not just those with a legislative requirement, to adopt good practices.

James Wates CBE, Chair of the Coalition Group that developed the principles, said:

“Good business well done is good for society. Private companies are a significant contributor to the UK economy, providing tax revenue and employing millions of people. They have a significant impact on people’s lives, and it is important they are well-governed and transparent about how they operate.

“These principles will provide a flexible tool for companies of all sizes, not just those captured by the new legislative reporting requirement, to understand good practice in corporate governance and, crucially, adopt that good practice widely. The principles are about fundamental aspects of business leadership and performance.”

Who do the new regulations apply to?

Companies with over 2,000 employees or revenue of £200 million globally and a balance sheet over £2 billion globally would have to comply with the new regulations.

What are the six principles?

Under the new guidelines, there are six principles that would need to be followed. They are:

Purpose – An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
Composition – Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
Responsibilities – A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
Opportunity and Risk – A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.
Remuneration – A board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
Stakeholders – A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good relationships based on the company’s purpose.

When does the consultation end?

The consultation is open until 7 September 2018.

The final version of the Wates Principles for Corporate Governance will be published in December 2018.

When will reporting begin?

Subject to Parliamentary approval, the new reporting requirement will apply to company reporting for financial years starting on or after 1 January 2019, with reporting to start in 2020.