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Article:

Largest private companies to disclose their corporate governance arrangements from 2019

16 July 2018

The UK's largest private companies will soon have to provide disclosures about their corporate governance arrangements. Associated with this new requirement, the FRC has published for consultation a new code aimed at these companies.

The new directors’ report disclosure requirement will apply to large companies with:

  • More than 2,000 employees, and/or
  • A turnover of more than £200 million and a balance sheet total (aggregate of amounts shown as assets in the company balance sheet) of more than £2 billion.

These tests are based on the individual company accounts (including large subsidiaries included in higher consolidations). There are exemptions from the disclosure requirement for:

  • Companies required by law to provide a corporate governance statement (eg fully listed companies)
  • Community interest companies and
  • Charitable companies.

 

What to report

Affected companies will need to prepare a ‘Statement of Corporate Governance Arrangements’ which gives information on:

  • Which corporate governance code, if any, has been adopted and
  • The company’s application of that code, including details and reasons for any departure.

If a corporate governance code has not been adopted, the Statement of Corporate Governance Arrangements must explain the reasons for not adopting one, together with a description of what arrangements for corporate governance were in place for that year. The Statement of Corporate Governance Arrangements must also be published on the company website.

The Government has also published accompanying Frequently Asked Questions which provides some guidance on applying the new directors’ report disclosure requirement.

 

New voluntary corporate governance principles

In an associated move, the FRC has begun a consultation on new voluntary corporate governance principles designed for private companies. These ‘Wates Corporate Governance Principles for Large Private Companies’ are intended to be the key code for companies that will be required to disclose a Statement of Corporate Governance Arrangements.

As private companies have no reliance on the public equity markets, the focus on shareholder protection and communication is a less important aspect of their corporate governance. In general, shareholdings are held by a smaller group of more involved investors and the objectives and actions of the company may be more heavily influenced by the needs of those individuals. In consequence, the six Wates Principles focus more on wider stakeholder needs as follows:

  • Purpose – An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
  • 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.
  • 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.
  • Opportunity and Risk – A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.
  • Remuneration – A board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
  • 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 relationships based on the company’s purpose.

The Wates Principles have been drafted on an “apply and explain” basis, meaning that companies adopting them must seek to apply all six of the high level principles and explain how they have done so. Therefore, they are more like the QCA Code of Corporate Governance (See May 2018 Business Edge article) than the FRC’s UK Corporate Governance Code (which is used on a ‘comply with or explain’ basis).

Read the Wates Principle’s consultation (closes on 7 September 2018).

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