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Corporate Governance Reform: what private companies need to know

Corporate Governance Reform: what private companies need to know
  • United Kingdom
  • Corporate - International corporate knowledge briefing


Background: why is the corporate governance of private companies on the horizon?

This week has seen two developments in corporate governance that will affect certain private companies. Private companies are not subject to a formal corporate governance regime in the same way as publicly listed companies. However, certain high profile corporate failures which have highlighted a lack of accountability and transparency have brought the issue of corporate governance for private companies into the spotlight. As we have seen from the Government’s Green paperCorporate Governance Reform (2016), the BEIS Select Committee Report in April 2017 and the Government’s response to the Green Paper published in August 2017 (“Response”), the Government believes that there is a strong case for strengthening the corporate governance framework for private companies. In January 2018, the Government appointed James Waites CBE to chair a group to develop a set of corporate governance principles for large private companies.

We have now seen the publication of both the draft Companies (Miscellaneous Reporting) Regulations 2018 and a consultation draft of the Wates Corporate Governance Principles for Large Private Companies.

Companies (Miscellaneous Reporting) Regulations 2018 (“Regulations”)

The Regulations impose different obligations on different types and sizes of company, and whilst some of the more headline grabbing requirements relating to pay ratio reporting and reporting on the impact of share price on executive pay apply only to quoted companies it is envisaged that the provisions summarised below will apply to private companies.

As envisaged in the Government Response, all relevant companies (both public and private) will be required to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to promote the success of the company for the benefit of its members.

Companies that are required to produce a Strategic Report[1] will have to include a statement in it describing how directors have had regard to the specific matters set out in section 172(1) when performing their directors’ duties under section 172(1) (a “Section 172(1) Statement”). The statement will also have to be made available on a website.

Relevant companies will also have to include in their Directors’ Report a summary of how their directors have engaged with employees, how they have had regard to employee interests, and the effect this has had, including on the principal decisions taken by the company during the financial year. This requirement will apply to companies with more than 250 UK employees (ie those that are currently required to include an employee statement in their Directors’ Report).

In addition, companies that meet the criteria for the Section 172(1) Statement will have to include in their Directors’ Report a summary of how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect this has had, including on principal decisions taken by the company.

There is some potential for overlap here between the matters to include in the Strategic Report and the Directors’ Report, as well as some questions that may arise from the consolidation of group accounts, and the Department for Business, Energy and Industrial Strategy (BEIS) have published a Q&A guide here which helps to clarify the requirements in this regard. The Q&A is helpful in explaining what companies will need to do to comply with the reporting requirements.

What about corporate governance?

One of the Government’s proposals in the Green Paper response was to develop a set of corporate governance principles for large private companies, and in addition, to require private companies of a “significant size” to disclose their corporate governance arrangements in their Directors’ Reports and on their websites.

The draft Regulations provide that companies within scope must include in their Directors’ Report a statement confirming which corporate governance code, if any, has been applied and how. Companies may choose the code that is most appropriate to their requirements. If the company has departed from any aspect of the code it must set out the respects in which it did so, and the reasons. If the company has not applied any corporate governance code, the statement must explain why that is the case and what arrangements for corporate governance were applied. The statement will also need to be published on a website maintained by the company.

This provision is proposed to apply to large private and unlisted public companies, ie those with 2,000 or more global employees; or a turnover of £200 million globally and a balance sheet total of over £2 billion globally. Further guidance for companies can be found in the BEIS Q&A.

Wates Corporate Governance Principles for Large Private Companies 

As noted, the Wates Corporate Governance Principles for Large Private Companies  (“the Principles”) were published by the Financial Reporting Council on 13 June, and it is envisaged that companies may choose to adopt the Principles as their chosen corporate governance code in order to comply with the requirements of the Regulations to disclose corporate governance arrangements.

Companies that adopt the Principles are expected to apply them fully. There are six principles, and companies will be expected to use an “apply and explain” approach and provide a supporting statement for each principle to demonstrate how their corporate governance operates in practice and achieves the desired outcomes. Companies are encouraged to explain in their corporate governance statement how applying the Principles has resulted in improved corporate governance outcomes. It is recognised that there is no “one size fits all “ approach to governance for private companies, and rather than taking a “tick-box” approach, companies can apply and explain the Principles in different ways.

The  Principles are set out below. They  are non-prescriptive and are set at a high level, but each principle is accompanied by non-exhaustive guidance, and companies will need to refer to this to apply the Principles in practice.

Principle One – Purpose

An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.

Principle Two – 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.

Principle Three – 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.

Principle Four – Opportunity and risk

A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.

Principle Five – Remuneration

A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.

Principle Six – 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 stakeholder relationships based on the company’s purpose.

Next steps and timing

The draft Principles include a list of consultation questions. The consultation on the Principles is open until 7 September 2018, and it is expected that a final version of the Principles will be published in December 2018.

The draft Regulations were laid before Parliament on Monday 11 June. Subject to Parliamentary approval, the Regulations will come into effect from 1 January 2019 with reporting to start in 2020.

Useful links

Companies (Miscellaneous Reporting) Regulations 2018

The Companies (Miscellaneous Reporting) Regulations 2018 – Q&A

The Wates Corporate Governance Principles for Large Private Companies

[1] In summary, companies must meet 2 out of 3 of the following to be required to produce a strategic report: turnover of more than £36m; total balance sheet of more than £18m and more than 250 employees.