Last week we wrote about a new requirement for listed companies with 250 or more employees to publish the pay difference between chief executives and other staff.
The draft legislation implementing this requirement also includes another requirement for large private (and unlisted public) companies to include a statement in the directors’ report about the company’s corporate governance arrangements.
To date, corporate governance requirements have applied predominantly to public companies but several recent high profile corporate failures and the impact these have had on wider stakeholders have drawn attention to the lack of accountability in large private companies. The actions of private companies can have an impact on the economy which is no less significant than those of public companies. Prompted by these concerns the Government has introduced a new corporate governance requirement for private companies.
Corporate governance requirement for private companies
The new requirement to produce a corporate governance statement will apply to companies (except those already subject to corporate governance requirements) that satisfy one or both of the following conditions:
- more than 2,000 employees; and/or
- a turnover of more than £200 million, and a balance sheet of more than £2 billion.
These large private companies will be required to state which corporate governance code has been applied and how it has been applied. If the company has departed from any element of the chosen code it must explain the reasons for doing so and if the company has not applied a code at all, it must explain why and set out what corporate governance arrangements have been implemented.
To assist, the Wates Corporate Governance Principles for Large Private Companies (the Wates Principles) have been published and a consultation is underway.
It is hoped that the Wates Principles will help companies of all sizes, not just those caught by the new legislation, to understand and apply good practice in corporate governance. There are six Wates 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 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.
The Wates Principles introduce a high level approach to governance acknowledging the different styles and corporate structures adopted by private companies in the UK. There is no one-size-fits-all approach to corporate governance so companies will be given the flexibility to adopt and implement arrangements that best fit their individual culture and philosophy.
Any company which adopts the Wates Principles is expected to do so in full using an ‘adopt and explain’ approach. A supporting statement should be provided for each of the six principles to give a clear understanding of how internal processes have helped to achieve the required outcomes and this statement should be published in the directors’ report and on the company’s website.
Guidance has been produced which will help companies apply the principles effectively. It can also be used to help companies produce a written explanation of how applying the code has helped to improve corporate governance internally.
The Financial Reporting Council has encouraged large private companies to engage in the consultation which is open until September 2018.
This blog post was written by Elliot Gibson. For further information, please contact:
Sophie Brookes, partner, Corporate team
T: 0161 836 7823