Last year, the UK Government introduced new legislation imposing a host of amendments to company regulation in the UK, applicable to financial years starting on or after 1 January 2019. Among the new rules is the requirement for very large private companies to include a corporate governance statement in their annual report.
While previously in the UK only publicly quoted companies had to select and report against a corporate governance code, this requirement has now extended to include private UK companies with over 2,000 global employees and/or a global turnover of over £200 million and balance sheets of £2 billion plus, as well as any wholly owned subsidiaries of listed entities that meet these thresholds. The legislation states that all companies that fall within these limits must report on how they are governed and how they abide by their chosen governance code. If the company has departed from any aspect of its corporate governance code, it must explain how it did so and why.
However, recent research suggests that many companies are not prepared for the new rules and that their corporate governance structure may not be as clear as it should be. A survey from Baker McKenzie found that 72% of companies surveyed (including 200 representatives of affected private companies) will have difficulty compiling and verifying the information required to comply with the legislation, while 56% admitted to still having a limited understanding of what is required to comply.
Guidance, criticism and support
In December 2018, shortly before the new reporting requirements took effect in January, the Financial Reporting Council (FRC) introduced the Wates Corporate Governance Principles for Large Private Companies. In the wake of the collapse of large retail chains such as BHS, which caused 11,000 workers to lose their jobs in 2016, the government and regulators looked at how they could step up oversight of large privately-owned companies. In August 2017, the government stated that it believed corporate governance needed to be strengthened and subsequently Sir James Wates was appointed to chair a coalition group tasked with developing appropriate corporate governance principles.
The Wates Principles are intended to help guide companies that are eligible to provide a corporate governance statement for the first time under the revised regulations. The principles, of which there are six in total, include boards ensuring they have sufficient skills to steer their companies wisely, and fostering relationships with stakeholders and assessing a company’s impact on society.
Both the corporate governance framework and the Wates Principles have come under fire from a number of quarters for their lack of clarity, and because there appears to be no robust framework to ensure compliance. Not everyone is critical, however, with many believing that a focus on the wider impacts of large companies on all stakeholders will help to prevent more corporate crises along the same lines as Carillion and BHS. Meridian Global Investment Fund Manager Richard Buxton, who contributed to the FRC’s consultation on the matter, said that “the new code, it will be quite revolutionary, it will require firms to have a purpose and to be able to evidence how they are taking into account the other stakeholders, not just the shareholders. This is a generational change that will improve governance."
A possible switch in regulators
Further complicating matters is the possibility that management of the UK Corporate Governance Code could be handed over to an entirely new regulator: the Audit Reporting and Governance Authority (ARGA). Some of the recent high-profile cases of corporate failure that have hit the headlines have led to the audit function coming under scrutiny. A major review of the FRC, the Kingman review – along with the Competition and Markets Authority and Brydon reviews – has recommended that the FRC should be replaced by ARGA, which would be a statutory body with stronger sanctioning powers.
This would negate some of the concerns over clarity and accountability, but there are fears that this new body would be too tough to be a good fit for the corporate governance framework. The Kingman review stresses that ARGA’s board “should not seek to be ‘representative’ of stakeholder interests”, suggesting that the new regulator would take a far more combative approach to oversight.
Delivering a compelling statement – what do you need to do?
Despite the lack of clarity, corporate governance looks set to remain high on the agenda, so it is imperative that large private businesses prepare to provide a compelling corporate governance statement, whether they choose to adopt the Wates Principles or not.
The ultimate purpose of the corporate governance statement is to help stakeholders decide if the firm is making good governance decisions with positive outcomes. It also presents an opportunity for the firm to promote its long-term success and identify ways to create and maintain value while mitigating risk. It is not intended to be a prescriptive list of actions. Nor is it merely a box-ticking exercise. Rather, it should be about emphasising effective leadership and management.
Though it’s only mandatory for larger private organisations, smaller private companies who have their sights set on growth or are considering listing on a major stock exchange may also wish to adopt the Wates Principles now as an indicator of good practice.
The aforementioned Baker McKenzie study further found that 77% of respondents intend to engage with external advisers and service providers to obtain clarity and ensure compliance – whether through helping them develop a clearer corporate governance framework, understanding and collecting the information required to meet the reporting requirements, or helping embed good corporate governance in their company culture.
Certainly, at Lawson Conner, our extensive UK and global regulatory and compliance expertise means we can advise the best ways to gain maximum benefit from these new reporting requirements – presenting your firm’s corporate governance outcomes to stakeholders in the most positive and productive way. In addition, we can provide cost-effective assistance with the various associated practicalities, such as due diligence, amending articles of association or introducing shareholders agreements.
About Lawson Conner
Part of the IQ-EQ group, Lawson Conner is an award-winning provider of outsourced regulatory hosting and compliance services. We offer a full range of solutions to help our clients manage the complexities of compliance regulations and requirements, including those presented by these recent changes in the UK.
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