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.

Background

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

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.

Consultation period

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.

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For more information, please contact Andrew Collins or Amelly Kok .