Corporate Governance update
There has been a lot of activity (at least on paper) in the ‘corporate governance’ arena over recent months. We draw out key and recurring themes from the Department of Business, Energy & Industrial Strategy’s (BEIS, formerly BIS) recent Green Paper on Corporate Governance Reform below. Subsequent to BEIS’s Green Paper (for which the deadline for responses was 17 February), the BEIS Committee separately published a report on its earlier inquiry which, amongst other matters, recommends a renewed focus on directors’ duties to promote the success of the company under section 172 of the Companies Act 2006, a voluntary code of conduct for private companies and simplifying executive remuneration; all of which fall within the themes drawn out from the Green Paper below. These are also themes featuring in election manifestos ahead of the General Election on 8 June.
The UK has led the way in corporate governance developments and the push for greater corporate transparency. This has been seen in, for example, the development and implementation of the “PSC (persons with significant control) regime”, requiring reporting of “persons with significant control” in companies ahead of European measures for beneficial ownership transparency being brought in through the Fourth Money Laundering Directive this year. It can also be seen in the UK’s wider approach to corporate governance, and particularly its approach to executive remuneration. These themes are reinforced in the BEIS’s Green Paper.
Corporate Governance reform
BEIS’s Green Paper looked at three key themes: (i) executive pay; (ii) strengthening the voice of a company’s various “stakeholders”; and (iii) corporate governance within large privately-held businesses. The Financial Reporting Council both responded to that consultation and is picking up these themes in its recently announced fundamental review of the UK Corporate Governance Code, which will also continue the FRC’s focus on succession planning and wider corporate culture.
Whilst private companies do not fall within the full UK corporate governance regime, with both BEIS and the FRC exploring corporate governance in large privately-held businesses this is a theme which we see continuing and developing over the coming months and years. We participated in the BEIS consultation through membership of the Law Society’s Company Law Committee and the Quoted Companies Alliance Corporate Governance Expert Group, and will continue to be closely involved in shaping and advising on developments.
Upcoming changes to the “PSC regime” as part of the UK’s implementation of the Fourth Money Laundering Directive and the proposed (but delayed) ban on corporate directors will impact small as well as larger companies and are part of the wider drive for transparency within corporate structures. Both are expected to take effect during the course of this year.
The public focus on private companies
The focus on private companies, in addition to public companies that are more used to life in the spotlight, follows on from high profile perceived failures of corporate governance at larger private companies and a wider focus on corporate “culture”. It is generally understood that regulation alone cannot drive better behaviours, but there has been concern that additional regulation is still being brought in and may damage entrepreneurial spirit. There is though acceptance that the right culture, when aligned with a firm’s strategy, can help to achieve long-term sustainable profits and it may be able to present opportunities for a business differentiating itself from competitors. Consideration will need to be given to ensuring that there is a consistent message that is also reflected in the various reporting statements you are required to make.
The focus on governance and transparency within large private, rather than just public listed, companies can be seen in a number of specific recent and current developments (which will also apply to publicly traded companies that meet the relevant criteria):
Commercial organisations carrying on business in the UK and having a turnover of at least £36 million per year (globally) have to prepare statements disclosing steps taken to ensure slavery or human trafficking is not taking place in any of its supply chains. This tracks the turnover threshold for reporting as a “large” company for Companies Act reporting purposes. The requirements apply for companies with financial years ending after 31 March 2016, so we have been advising a number of our clients to help them analyse their supply chains and prepare for having to make the statements this year.
A private member’s bill was introduced (by Baroness Young of Hornsey) in November 2016 which aimed to strengthen the legislation. It was expected to resume its second reading debate on 24 March 2017 and appears not to be progressing further through Parliament, but demonstrates the continued focus in this area.
Prompt payment reporting
Originally intended to be implemented last year, the final regulations were published in March and took effect from 6 April this year. The Government’s aim is to increase transparency around large businesses’ payment practices and to promote prompt payment to support those businesses that they trade with. Again, rather than focussing on just public listed companies, the regulations apply to larger private companies as well (and LLPs through parallel regulations) with reference to the existing reporting thresholds for “large” companies. The intention is that businesses within scope will have to report twice yearly on their payment practices and performance, including for example the average time taken to pay invoices.
Gender pay gap reporting
We have covered this additional reporting measure separately in an article on mandatory gender pay gap reporting, which applies to large employers (again, public and private), broadly those with 250 or more employees. The regulations took effect together with the prompt payment reporting regulations on 6 April.
The additional focus on public companies
Listed companies will continue to be subject to additional requirements and scrutiny. This year will see a number of companies having to put their remuneration policies to another binding vote, which will add to the continued focus on directors’ remuneration and require careful dialogue with key shareholders ahead of finalising the policy and the vote itself. As a listed company, you will also have to carefully consider institutional shareholder views and guidance on for example share buy backs and pre-emption rights and the continuing developments in auditor and audit committee requirements, as well as the other themes noted above.
This article was written by David Hicks. For more information please contact David on +4402074276647 or at firstname.lastname@example.org.
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