The UK government has put through a reform of the Corporate Governance Code, and the new regulations apply, for the first time, to large private companies. This is in response to a series of private business failures that have shaken the economy of the entire country. Most large private businesses have resisted adopting best-practice corporate governance. But now, these companies must face the same requirements as those listed on stock exchanges. This means that large private businesses must adapt to more rigorous corporate governance standards – a board portal solution can provide the support needed to help make the changes needed.
UK private companies are now subject to Corporate Governance Code
Faced with a series of headline-grabbing corporate failures, the UK government has reacted to these failures with reform to the Corporate Governance Code, as the Parliament Briefing Paper notes.
Previously, the Corporate Governance Code was only a direct requirement for listed companies, which had to either comply with the Code or explain why they did not do so.
Now private companies will be expected to do the same. Technically, compliance with the Code will only be voluntary, but there will be strong pressure from shareholders and investors to comply.
“Simply leaving private companies which have significant impacts on our society to ‘get on with it’ is no longer a tenable option,” warns Peter Swabey, Policy and Research Director at the Institute of Chartered Secretaries and Administrators.
“Many companies and their boards recognise clearly the wider societal responsibilities they have and the enormous benefit they gain through wider engagement around their business activities. However, some have said that companies need to do more to reassure the public that they are being run, not just with an eye to the interests of the board and the shareholders, but with a recognition of their responsibilities to employees, customers, suppliers and wider society,” comments the Business, Energy and Industrial Strategy (BEIS) Select Committee report on corporate governance..
The new requirements will specifically affect companies with either a headcount of over 2,000 employees or a turnover of over £200 million (US$267.7 million) and a balance sheet of £2 billion (US$2.67 billion). Coming just after recent changes to corporate governance rules for AIM-listed companies, the new corporate governance reporting requirement for private companies is intended to ensure that there will be fewer disasters that affect all strata of society when these companies become insolvent.
Changes in the Boardroom
Not surprisingly, these changes are meeting some resistance. As a Financial Times editorialist writes: “Private companies are very often the property of founders or their families. As long as they treat staff, customers and suppliers decently and within the law, governance is up to them. The government should follow the example of owner managers: mind their own business.”
It is clearly necessary, however, for private business owners to permit others to mind their business, and that is where the new rules come in.
The challenge is for private company owners, including families and small groups, to begin sharing information on operations and to ensure that key internal controls, including those regarding cybersecurity, are in place.
These issues include:
- Board selection: Directors, even non-executive directors, are selected by the standing board, and so often hesitate to challenge decisions made by those there before them. This is especially true at private companies because directors often feel that they “owe” their position to family members or their friends, and so are less likely to challenge controversial issues, such as executive pay or investment decisions. Bolstering director independence is something that private company boards must undertake for the first time.
- Board evaluations: This is an area in which private companies traditionally lag well behind public ones, notes Managing Director of Kona Advisors Bruce Werner. “Most private company boards have not matured to the point where they have a disciplined and consistent self-appraisal process. Designing board evaluations with intention will bring focus and purpose to the assessment process. Further, private company owners may hesitate to add the skills and experience they lack for cost reasons. Private companies will have to make a natural step in their governance evolution and build boards that perform much more efficiently.
- Board composition: Clearly, the ideal board for a private company would be a diverse collection of experienced executives, each with different but complementary skills. “But engaging a slate of experienced and independent executives in strategic planning, financial analysis, audit and other committees — that takes time and money. And — it’s work for the owners or managers keeping the board informed and collaborating,” writes KPMG in a recent report.
- Boardroom communications: It is the responsibility of every board member to stay abreast of all events and trends that might affect the company. The pressure to stay up-to-date can be terrific, particularly for a board member with competing responsibilities. A board portal can take this pressure off a director, because it provides a library of all events, documents and news that the director needs to do the job.
Diligent Governance Cloud
Diligent’s Governance Cloud enables directors to stay up-to-date at all times on the latest regulations and policies. Governance Cloud is Diligent’s ecosystem of cloud-based governance tools that provides a complete solution to enable leading bodies of organisations to mitigate risk and govern collectively at the highest level.
Seasoned in the governance space, Diligent has been in the leading position in the market for more than 15 years, offering the industry’s leading, most secure and intuitive board management technology. Our deep customer insights and heavy investment in R&D have allowed us to expand our offering to support the full governance journey.
And Diligent Evaluations provides all of the support required to make the board member evaluation process fast and effective. Questionnaires can be produced rapidly and communicated to the board in a secure environment. With Diligent Boards, secure communications and document sharing ensures that directors can deal with sensitive issues without fearing leaks.
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