As part of its objective to strengthen the corporate governance regime in the UK, the Government announced last year, in response to its green paper consultation on corporate governance reform, that some of the largest UK private companies will be required to include a new statement on their corporate governance arrangements as part of their directors’ report.
Regulations were published on 17 July which set out the content of the new statement and the companies that will be required to provide it.
The new reporting requirement on corporate governance arrangements for large private companies forms part of a number of measures set out in the regulations to implement changes to the existing corporate governance framework. Details of other corporate governance reporting requirements can be found in our separate briefing note which can be found here.
Which companies will be subject to the new regime?
Subject to certain exemptions, a company will fall within the scope of the regulations and be required to produce the new statement if it meets either one or both of the following criteria:
- it has more than 2000 employees; and/or
- it has a turnover of more than £200 million and a balance sheet of more than £2 billion.
Community interest companies, charitable companies and companies that are already required to provide a corporate governance statement (e.g. premium listed companies) are all exempt from the new requirements.
What must the statement include?
The statement must identify which, if any, corporate governance code the company applied during the financial year and how the company applied it. If the company departed from any aspect of the relevant code, the statement must also include details of this together with the reasons for the departure. If the company did not apply any corporate governance code during the relevant financial year, the statement should set out why that is the case and what alternative arrangements for corporate governance the company applied instead.
The statement of corporate governance arrangements will form part of the directors’ report of a qualifying company and must be available on a website maintained by or on behalf of the company.
From when do the regulations apply?
The new reporting requirement will apply for financial years beginning on or after 1 January 2019 (with the first statements of corporate governance arrangements therefore appearing in directors’ reports during 2020).
What corporate governance code will qualifying companies apply?
In light of the new requirement for private UK companies to report on their corporate governance arrangements, and in recognition of the differing circumstances and ownership structures of private companies, the Government appointed James Wates at the beginning of the year to chair a coalition of various industry bodies and other organisations to develop a set of corporate governance principles for private companies.
The Financial Reporting Council published for public consultation the Wates Corporate Governance Principles for Large Private Companies (the Principles) shortly after the draft regulations were laid before Parliament.
Whilst the regulations make it clear that a qualifying company can choose which, if any, corporate governance code it will apply, companies may voluntarily adopt the Principles as a suitable framework when reporting its corporate governance arrangements.
More generally, it is hoped that the Principles will provide a helpful framework for a wide range of private companies and not only those required by the regulations to report on their corporate governance arrangements.
A qualifying company that adopts the Principles as part of its reporting requirements under the new regulations is expected to apply them fully using an “apply and explain” approach. This means that the company should provide supporting evidence for each principle that “gives an understanding of how their corporate processes operate and achieve the desired outcomes”.
The Principles deliberately provide a high-level approach to corporate governance in recognition of the different ownership and management structures of private UK companies. While that is the case, there is non-exhaustive guidance beneath each principle that will assist companies in applying the principles in practice.
There are six principles:
- 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 establishing oversight for the identification and mitigation of risks.
- 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.
- 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.
Commentary and next steps
Following the high-profile collapse of private companies such as BHS, it is no surprise that the Government is seeking to strengthen the corporate governance requirements for some of the UK’s largest private companies.
Whilst the Principles are subject to consultation, it is clear that some of the very largest UK private companies will need to consider carefully whether the Principles are a suitable corporate governance framework to adopt voluntarily for the next financial year.
Although the Principles will be of particular interest to companies falling within the scope of the new regulations, as this is the first corporate governance code drafted specifically for private companies it should be of broad interest to all private companies in the UK.
The consultation in relation to the Principles has closed with final Principles due to be published in December.
Shepherd and Wedderburn LLP have participated in responding to the consultation on the Principles and we would be happy to discuss them with interested clients. Please contact us through your usual S+W contact.