As of January 2019, the largest private companies in the UK must, according to law, report on compliance with corporate governance as stated in the UK Corporate Governance Code, or other versions of the Code. This will oblige the boards of these companies to take a hard look at what they are doing, and how well they are succeeding.
Private Companies must apply the UK Corporate Governance Code
The UK Corporate Governance Code was drafted originally for listed companies with the purpose of protecting shareholders. But, as of January 2019, private companies with more than 250 employees will have to apply the Code, or explain why they have not done so.
Non-compliance could prove expensive – as fines are considerable – but also embarrassing for the company as investors and stakeholders raise questions.
Many UK private companies, in general, often apply corporate governance principles in any case, simply because it is better for business. But now there is a sea change: They must report on their relationships with stakeholders and radically improve transparency. And they must take action by January 2019. Reporting requirements will go into effect on that date, and the UK Parliament is set to enact draft legislation on Corporate Governance before the new year.
Why should private companies endure more regulation? There have been a number of corporate failures that have seriously impacted the UK economy in recent years. The result is that, on June 13, 2018, the UK government commissioned a committee of experts led by James Wates, CBE, to draft principles of Corporate Governance for large private companies.
Asked to answer the question, ‘how will private companies apply the UK Corporate Governance Code,’ the Wates Committee drafted regulations, which will require the very largest companies in the UK to “comply with or to explain why not” in their annual reporting. While only the very largest private companies will be required to “comply or explain” against the UK Corporate Governance Code, the regulations will also introduce other new corporate governance reporting requirements which will apply to all companies with more than 2,000 employees, a turnover of more than £200 million and a balance sheet of more than £2 billion.
6 principles from Wates – Supporting governance in private companies
The six principles elaborated by the Wates Committee 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 (from Committee publication).
As Peter Swabey, Policy and Research Director at the Institute for Chartered Secretaries and Administrators, points out in a recent article, these principles are deceptively simple.
The challenge comes with the requirements to report on them: Is the board identifying opportunities to create and preserve value? How will you demonstrate that the board is indeed taking these actions – one could imagine writing volumes?
Further, a company secretary at a private concern might ask: To whom are we reporting? What is this report supposed to accomplish?
Public companies report to shareholders, Swabey notes. Private companies must now report to the business community. “Companies must demonstrate focus on these outcomes, but companies may apply them in different ways. An example of this is given in relation to principle 2 (board composition). While a large family-owned company might seek to appoint an independent director to its board for independent challenge, a large subsidiary of a UK-listed company may establish an advisory committee to seek independent objective advice as to the board effectiveness.
Both should explain in their reporting how this has improved director decision-making. This is quite distinct from the FRC’s full UK Corporate Governance Code for listed companies, which recommends that a majority of directors on the board be independent non-executive directors and sets out strict requirements around independence,” writes lawyer Kate Higgins in the London office of Mishcon de Reya.
Getting the corporate governance message across
Board members and company secretaries at private companies should understand that the proof of compliance or the related explanation must state the facts in a manner that would enable shareholders to evaluate this application, as Listing Rule 9.8.6 puts it.
Firstly, it is often argued that it is more difficult to explain how you have applied the principles than it is to say that you have ‘ticked the boxes’ of the provisions – which is what many companies settle for. The robust explanation now required will communicate to the business community whether the board is doing its job.
Although compliance with the Wates Principles is entirely voluntary, if a company wants to benefit from stating such compliance, they cannot just say, “the company complies with each of the Wates Principles.” The board will be expected to provide a supporting statement for each of the six Principles that gives an understanding of how their corporate governance processes operate and achieve the desired outcomes. This approach to compliance is one of the most interesting and innovative elements of the Wates Principles. It will also make drafting the corporate governance statement a real challenge in the next couple of years, as each company will have a unique perspective on how they seek to apply the Wates Principles.
Diligent’s Governance Cloud: A reliable tool for achieving compliance
Diligent’s Governance Cloud, the only integrated enterprise governance management solution that enables organisations to achieve best-in-class governance, is an ecosystem of software tools that digitises the various activities and tasks for the board of directors. As organisations grow more complex and regulations more stringent, the scope of governance responsibilities evolves. The Governance Cloud allows boards of directors to meet the demands in the boardroom and beyond with the ability to select the products they need that help them perform their best and work within their allotted budgets.
Governance leaders, executives and board directors rely on the industry-leading Diligent platform for the most secure and intuitive solution to board material management and collaboration. Diligent Boards™ is a board portal that electronically stores a board’s agendas, documents, annotations and discussions within a secure board portal. Board secretaries and board chairs can use the portal to put together board books in minutes. The portal also has designated virtual rooms for committee work. Administrators of the portal can designate permissions for users to access various areas of the portal to avoid unnecessary problems with confidentiality. The “Manage Meetings” feature consolidates board directors’ contacts, calendars and the logistics of meetings. The program is a secure and intuitive solution for managing board materials and collaboration.
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