News | July 5, 2018

New Corporate governance standard for private companies

Corporate governance is a good thing. Well governed companies have been demonstrated to make better decisions and are less risky than poorly-governed companies. However, there is a broad spectrum of behaviours and views as to what is good governance.

The UK Corporate Governance Code, as published by the Financial Reporting Council is focussed on large public companies with listed equity securities. Its principles are generally sound and make good business sense, but it is rather prescriptive and inflexible in its approach.

Large public companies form only a fraction of one per cent of all companies in the UK. How can all of the rest deliver good governance?

Many companies have sought to apply The UK Corporate Governance Code, or at least its principles. Others have followed the Quoted Companies Alliance Code, being the much more purposive code based around ten principles of governance which is very popular amongst AIM companies. The Quoted Companies Alliance Code has always been considered as a building block, of use to private companies seeking to grow as much as for smaller public companies.

However, last year the government decided that two corporate governance codes for UK companies was not enough and that there was a need to create a third for large private companies. This has now been done through a group led by the chairman of Wates PLC, James Wates CBE, supported by a secretariat provided by the Financial Reporting Council. But where will it end? How many more codes do we need? Is there a danger that companies will spend too much time navigating through codes and rules and thereby both forget the reasons for good governance and be unable to reap the benefits of good governance?

The Wates Corporate Governance Principles for Large Private Companies have now been published in draft for consultation.

Whilst it was notable that the Quoted Companies Alliance was not included within the process, the Principles draw a lot from the QCA Code. Wates has determined that there are six Principles of governance (purpose, composition, responsibilities, opportunity and risk, remuneration and stakeholders). However, what the Wates Principles fail to focus on is effective communication, deep engagement between companies, investors and other stakeholders and the ethical framework within which conscionable business operates.

Comments on the draft Principles are invited by 7 September 2018.

It is clear that these principles are intended to raise the standard of the lowest common denominator. However, it is notable that they fail to recognise those companies which already go far beyond what is expected, not because a regulator tells them to do so, but because it makes sound business sense.

By the way, keep an eye out for the new UK Corporate Governance Code which is to be issued on Monday 16 July.

For further information please contact Edward Craft or Kamalprit Lally