The Financial Reporting Council (FRC) has published a consultation on corporate governance principles for large private companies, on behalf of James Wates who has been chairing a coalition group considering the need for improved transparency and accountability in this area
Large private companies will be encouraged to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis.
Those that do so will meet the new requirements in The Companies (Miscellaneous Reporting) Regulations 2018, which include a new corporate governance reporting requirement for all companies with more than 2000 employee, a turnover of more than £200m, and a balance sheet of more than £2bn.
This new reporting requirement will apply to financial years beginning 1 January 2019 with reporting to start in 2020.
The six principles 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.
James Wates, chair of the coalition group that developed the principles, said: ‘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 consultation asks for feedback on whether the principles address the key issues of the corporate governance of large private companies, whether they take account of different ownership structure, and if there are areas where they should be more specific.
There are also questions about whether the principles ensure key shareholders have sufficient visibility of remuneration structures in order to assess how workforce pay and conditions have been taken account in setting directors’ remuneration, and about how their implementation should be monitored.
The consultation is open until 7 September. The final version of the Wates principles for corporate governance will be published in December 2018.
Membership of the coalition which produced the principles includes representation from the FRC, the Institute for Family Business, the Institute of Directors, Confederation of British Industry, the Institute of Business Ethics, British Private Equity and Venture Capital Association, the Investment Association, the Climate Disclosure Standards Board, ICSA: the Governance Institute, and the Trades Union Congress.
Report by Pat Sweet