For financial years beginning 1 January 2019 (subject to Parliamentary approval), legislation will require large private companies to disclose their corporate governance arrangements in their directors’ report and on their website.
The new reporting requirement will apply to all companies which satisfy either or both of the following conditions:
- more than 2,000 employees
- a turnover of more than £200m and a balance sheet of more than £2bn
Following feedback, the Financial Reporting Council (FRC) has issued the Wates Corporate Governance principles for large private companies (the Principles). By explaining how they have adopted the Principles, Large Private Companies will be able to meet their obligations under the Companies (Miscellaneous Reporting) Regulations 2018.
At an ICAEW dinner last week, James Wates, who chaired the coalition that developed the Principles, made four points that we thought were interesting:
- the Principles serve to give some ‘colour’ to the obligations that directors have had for many years under Section 172 of the Companies Act;
- all he wants the Principles to achieve is to give companies the chance to explain, as the best ones already do, how well they are set up governance-wise – ‘to tell a story about themselves’;
- he wants companies to avoid boilerplate - the new requirements should add no more than two pages of narrative at most to annual reports; and
- the government will have to enforce the new regime, the success of which will be determined by how good the policing is.
The Principles and Guidance
The Principles should be adopted on an ‘apply and explain’ basis ie companies will have to explain how they have applied all the principles. This differs from the UK Corporate Governance Code which is adopted on a ‘comply or explain’ basis.
The six principles are:
- 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.
- Board 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.
- Board responsibilities - The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.
- 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 for the identification and mitigation of risks.
- 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.
- 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.
The Principles introduce a high-level approach to good corporate governance which can be applied by any large private company, while allowing sufficient flexibility for companies to explain the application and relevance of their corporate governance arrangements.
Guidance has been included to support the principles. Companies will not find this a prescriptive list of actions they must take or boxes they must tick. The Principles are about fundamental aspects of business leadership and performance, which every company must interpret and apply for itself.
For further information, please contact Tom McMorrow.