The Financial Reporting Council: Consultation on the Wates Corporate Governance Principles for Large Private Companies
On 13 June 2018, the Financial Reporting Council (FRC) published a consultation on corporate governance principles for large private companies (the Principles) and supporting guidance. The Principles are a voluntary set of corporate governance principles for large private companies developed by the Coalition Group, an industry group chaired by James Wates CBE (of family-business, Wates Group) and constituted by representatives from the FRC and various industry bodies including the British Private Equity & Venture Capital Association, the Confederation of British Industry, the Institute of Directors and the Trades Union Congress.
The development of the Principles follows the Green Paper on Corporate Governance Reform which considered ways which would strengthen the UK corporate governance framework to help ensure, amongst other things, that business performance is improved. It is considered that UK’s strongest corporate governance and reporting standards are currently focused primarily on listed public companies. However, large private companies have a growing economic importance, and their actions and governance can have potential significant impact on other stakeholders. As such, there is a keen interest in strengthening the standards of corporate governance in large, privately-held businesses.
The Principles seek to accommodate the variety of large UK incorporated private companies by introducing a high-level approach to good corporate governance. The Coalition Group believes the Principles 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.
The Coalition Group expects a company that adopts the Principles to apply them fully and, using an ‘Apply and Explain’ approach, large private companies are expected to provide a supporting statement for each principle that gives readers an understanding of how their corporate governance processes operate and achieve the desired outcomes. The non-exhaustive guidance supporting each principle is intended to help companies apply the Principles in practice; it is not intended to be a check-list. The Coalition Group encourages companies adopting the Principles to demonstrate, through a written explanation, how the application of the Principles has resulted in improved corporate governance outcomes.
The six Principles (taken direct from the consultation paper) are:
- Principle One - Purpose: An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
- Principle Two - 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.
- Principle Three - 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.
- Principle Four - Opportunity and risk: A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.
- Principle Five - Remuneration: A board should promote executive remuneration structures aligned to the sustainable longterm success of a company, taking into account pay and conditions elsewhere in the company.
- Principle Six - 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 stakeholder relationships based on the company’s purpose.
The draft Companies (Miscellaneous Reporting) Regulations 2018
The Principles and guidance are intended to help companies comply with the draft Companies (Miscellaneous Reporting) Regulations 2018 (the Draft Regulations) which were laid before Parliament on 11 June 2018. If approved in their current form, large private companies (see qualifying conditions below) would be required to provide a statement of corporate governance arrangements in a given financial year in their directors’ report and on their website, which states:
- which corporate governance code if any, the company applied in the financial year;
- how the company applied that corporate governance code; and
- if the company departed from that corporate governance code, the respects in which it did so, and its reasons for so departing.
If the company has not applied any corporate governance code for the financial year, the statement of corporate governance arrangements must explain the reasons for that decision, and explain what arrangements for corporate governance were applied for that year.
Large private companies
The new reporting requirement introduced by the Draft Regulations above applies to all companies that satisfy either or both of the following conditions:
- more than 2000 employees;
- a turnover of more than £200 million and a balance sheet total of more than £2 billion.
The new reporting requirement will apply to financial years beginning 1 January 2019, with reporting to start in 2020. Companies will be able to apply the Principles and meet the Government’s new reporting requirement. The Coalition Group, however, hopes that the Principles will also provide a useful tool for a wide range of companies (not just those covered by the new reporting requirement introduced by the Draft Regulations above) to understand and adopt good practice in corporate governance.
The consultation is seeking feedback on whether the Principles are set at the right level, and also aims to identify areas which could be improved. A copy of the consultation paper can be found here, where a full list of consultation questions can be found.
The FRC has requested that responses to the consultation should have been received by 7 September 2018.
The final version of the Principles is expected to be published in December 2018, so as to align with the coming into force of the Draft Regulations.
Our view: a shift of focus?
Development of the UK corporate governance framework and reporting standards to date have primarily been focused on listed public companies. The Draft Regulations and the Principles demonstrate an extension of the Government’s focus and intention now to strengthen the standards of corporate governance in large private companies. Although small and medium-sized companies will be exempt under the Draft Regulations from providing a statement of corporate governance arrangements, it is expected that the high-level approach to good corporate governance introduced by the Principles could, over time, encourage good practice by smaller companies and pave way to improve standards of corporate governance in private companies generally, regardless of size. In time, the direction of travel is expected to encompass voluntary compliance.
Marcus Stuttard will provide his unique insight and a "state of the nation" market update.
Charles Russell Speechlys advises Topland Group on two key transactions
Topland Group is one of the largest multi-billion pound, privately owned investment groups.
Yahoo and Food Business Africa cover the firm's involvement in Oba Pack's investment in the Babator Farming Company
Oba Pack Company Limited, a Ghanaian-owned agribusiness, purchased the Babator Farming Company Limited (BFC) on 31 December 2021.
Le Monde du Droit and Fin Year cover the firm's involvement in Resilience's acquisition of Betterise
The Paris office has advised Resilience on their acquisition of Betterise.
Diversity and Inclusion: Clear transparency?
This article focuses on the published its Consultation Paper on diversity and inclusion on company boards and executive committees in July.
Listing Rules changes are in...exciting times for founders and fast-growing companies
Charles Russell Speechlys advises FairXchange on investment from United Fintech
FairXchange was founded in 2016, to bring clarity and transparency to execution performance through the provision of independent data.
ESG - do your priorities need to change with a changing landscape?
This article lists the forthcoming legislation and other initiatives which impact on public and quoted companies.
Mandatory climate-related disclosures coming soon
On 28 October 2021, the government published its response to its consultation on mandatory climate-related disclosures.
Charles Russell Speechlys advises Acora on the acquisition of M9 Holdings
The acquisition of M9 Holdings marks the latest stage in Acora’s growth journey.
Reform of the UK Prospectus Regime
This article focuses on three aspects of the consultation: Quality and Duplication, Widening participation in public offers, Agility
Piers Master and James Broadhurst write for eprivateclient on the goals of a family office
What are the goals, priorities or concerns often raised by families?
Rebecca Burford quoted by Citywealth on family offices’ ESG considerations for their private market investments
Family offices are increasingly deploying a growing portion of their assets to the private markets.
The Surrey Chambers of Commerce report on the Dental team’s involvement in Dentex’s acquisition of its 100th dental practice
The Dental team in Guildford has advised Dentex on the acquisition of Courtyard Dental Practice based in Saffron Walden in Essex.
Charles Russell Speechlys advises Dentex on the acquisition of Courtyard Dental Practice
Dentex is a fast-growing dental group focussed on developing its practices and optimising how dental practices operate.
Charles Russell Speechlys advises Puma Private Equity on their investment into Everpress
Puma Private Equity offers a wide range of award-winning investments that help to support investors.
Overhaul of London's stock market listing regime set to significantly boost capital raising opportunities for high-growth and founder-led technology companies
The review was triggered by Brexit and the opportunity for London’s capital markets to move away from EU rules.
The Chartered Institution of Taxation (CIOT) Budget representations for October 2021
The CIOT has recommended an extension of the EMI scheme and a fairly comprehensive review of the rules underpinning EOT relief.
International Adviser report on the firm's appointment of David Collins as Divisional Managing Partner for Business Advisory & Transaction Services
David Collins has been named as Divisional Managing Partner.
UK Government issues initial consultation on potential new power to block listings on national security grounds
The Government is proposing new power block listings on national security grounds. Read this article to find out more.