Up to now, the Corporate Governance Code has been something applying to listed companies and private companies have had no obligation to follow similar guidance. For larger private companies, the implementation of the Wates Report marks a change to mandatory reporting on corporate Governance for financial years starting after 1 January 2019.
Larger companies are those with more than 2000 employees or companies with a turnover exceeding £200m and a balance sheet of over £2bn. That will still catch a good number of private companies , including some major subsidiaries of listed PLCs.
All this is designed to reinforce the requirement on all boards, public and private, to apply s172 [ link to blog on s172 ] of the Companies Act 2006 and consider the interests of the workforce, suppliers, customers, pensioners, the community of stakeholders and the environment in decision making.
Larger private companies now need to set out what Code they apply, how they have applied it ( and how it operates) , where they have departed from it ( and why ) , and if they have not followed any Code , explain why and what they have done instead.[ fotenote to refer to The Companies( Miscellaneous Reporting) Regulations 2018] In effect, Apply or Explain.
The Private Company Code, which most large private companies will follow, sets out six principles to follow:
1. PURPOSE and LEADERSHIP
An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
2. BOARD COMPOSITION
Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficientcapacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
3. DIRECTOR RESPONSIBILITIES
The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should supporteffective decision-making and independent challenge.
4. OPPORTUNITY and RISK
A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight forthe identification and mitigation of risk.
5. REMUNERATION
A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
6. STAKEHOLDER RELATIONSHIPS and ENGAGEMENT
Directors should foster effective stakeholder relationships aligned to the company's purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
These are amplified in the guidance on the FRC's website [ link to The Wates Corporate Governance Principles for Larger Private Companies, December 2018]. It seems likely that over time the thresholds for mandatory compliance will reduce and drive wider adoption of the Code.
Robert Armour - March 2019
