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Corporate Governance Principles For Large Private Companies

Corporate Governance Principles For Large Private Companies

The UK’s corporate governance framework provides a series of codes by which companies can adopt and implement effective measures of control.  The strongest of such corporate governance and reporting requirements apply to publicly listed companies. 

The Companies (Miscellaneous Reporting) Regulations 2018 will require large companies (defined as those with either more than 2,000 employees or having a turnover of more than £200 million and balance sheet of more than £2 billion) to disclose which corporate governance code, if any, they applied during the financial year in question, and how they applied the code.  If there had been any departures from the requirements of the code, these must also be disclosed, for financial years beginning on 1 January 2019 onwards.

In June 2018, the Wates Corporate Governance Principles for Large Private Companies were published as part of a consultation exercise, with the final principles being expected to be published in December 2018.  The Wates principles provide a dedicated framework to large private companies to guide and direct them in matters of good corporate governance. 

What are the Wates principles?

There are six key principles involved:

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 long-term 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 reporting practice which flows from The Companies (Miscellaneous Reporting) Regulations 2018 will require companies to adopt and “apply and explain” approach to the disclosure of how the Wates Principles are applied, including explaining any deviation from them.

Companies that adopt the principles are expected to apply them fully, rather than extracting principles from several different codes.  Equally, it is not intended that guidance be applied in a “tick-box” manner.  Those who adopt the principles will be encouraged to provide a written explanation in the directors’ report and company website of how the application of the principles has resulted in improved corporate governance outcomes.  Nothing in the principles is intended to override responsibilities of directors set out in the Companies Act 2006.

It is hoped that the principles will further promote the UK’s reputation as a global leader in corporate governance by enhancing transparency and accountability within its largest private companies, and ultimately helping to improve public trust in business.  Whilst there will be some time before the publication of financial statements which will include the relevant statements on how the code has been applied, there will be interest in the approaches taken by those large private companies who don’t presently adhere informally to any of the other existing codes.

Gary Gray

Head of Company Secretarial Services

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