Voluntary corporate governance rules to monitor private companies

The so-called Coalition Group set up to develop specific corporate governance rules for large privately owned companies to improve transparency will be chaired by James Wates, chairman of the Wates Group but the final measures will only be voluntary for companies

The appointment is part of government attempts to introduce a tougher regime of corporate governance to provide oversight of the largest privately owned companies in the UK following the collapse of BHS.

The Coalition Group was set up last summer following the outcome of a government green paper consultation on corporate governance reform and is briefed to come up with a new corporate governance framework specifically for large privately owned companies which are not covered by the Corporate Governance Code, followed by UK listed companies.

The government has stated that the new governance code will ‘encourage large private companies to adopt stronger corporate governance arrangements, reflecting their economic and social significance, through the development of a set of corporate governance principles; and introduce new measures to require companies, both public and private, of a significant size to disclose the corporate governance arrangements they have in place’.

Heavy criticism of the lack of corporate responsibility has forced the government to take action.

Currently section 172 of the Companies Act 2006 covering directors’ duties requires the directors of a company to consider governance interests when promoting ‘the success of the company’, but a large number of respondents to the recent green paper thought that this aspect of the legal framework should be strengthened through improved reporting, Code changes, raising awareness and more guidance.

As a result, secondary legislation will be introduced to support new rules to require all companies of significant size (private as well as public) to explain how their directors comply with the requirements of s172 in relation to employees and other interests.

The government has also asked the Financial Reporting Council (FRC), as the umbrella body, to consult on a specific Code provision requiring premium listed companies to adopt, on a ‘comply or explain’ basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.

The new private company framework will be a voluntary set of corporate governance principles for large private companies althought there will be secondary legislation requiring companies to publish details on their website about whether they ‘follow any formal code’. The government is also considering whether to extend the principles-based rules to limited liability partnerships (LLPs) of equivalent scale.

The Coalition Group is made up of a group of professional bodies and associations, and will be based out of the Financial Reporting Council’s (FRC) London offices.

Members include senior representatives from the Institute of Directors, CBI, F, Institute for Family Business, British Private Equity & Venture Capital Association, Institute of Business Ethics, Investment Association, Climate Disclosure Standards Board, ICSA: the Governance Institute and the TUC.

Despite a cataloge of corporate failures, the new principles will only be voluntary for companies.

The FRC said that the voluntary corporate governance principles will aim to promote:

•             best practice in corporate governance and reporting arrangements;

•             public trust and confidence through greater transparency in the manner in which large privately-owned companies conduct their business;

•             strong corporate culture and integrity within large private businesses, encourage broader consideration of workforce and wider stakeholder representation and interests; and

•             investor, lender and creditor confidence to facilitate long-term value and improved productivity.

There is no timeframe on dates of release of the rules and enactment of the secondary legislation. 

Corporate governance reform: government response to the green paper consultation

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