Red Tape or Sensible Protections

 New Corporate Governance Code For Private Companies.

The Government has published its response to the consultation launched by its Green Paper on corporate governance (published in November 2016).

There has been widespread coverage of the Government’s response in the media, but the focus of this attention has been the likely impact on listed companies.

The Government’s proposals do, however, extend to private companies, prompted, it is understood, by the collapse of the retailer BHS in 2016. The purpose of this briefing note is to consider what effect the proposals might have for such companies.

The Government has identified broad-based support for steps to be taken to encourage high standards of corporate governance in the UK’s largest private companies, bearing in mind the significant impact that these companies have on employees, suppliers, customers and others. There are two main proposals:

  1. The Government intends to invite the Financial Reporting Council (FRC) to work with the Institute of Directors, the Confederation of British Industry, the Institute for Family Businesses, the British Venture Capital Association (BVCA) and others to produce corporate governance principles which would be intended to form a voluntary code for large private companies. It is proposed that this work should be carried out under the chairmanship of a business figure with relevant experience.

 

  1. Secondary legislation is proposed to require “companies of a significant size” to disclose their corporate governance arrangements in their Directors’ Reports and on their websites. This would not apply to companies subject to an existing corporate governance reporting requirement, such as that developed by the BVCA for private equity-owned businesses, if that is considered to be more appropriate. The Government is considering extending this requirement to limited liability partnerships (LLPs) of equivalent scale. For these purposes, the Government’s initial view is that “companies of a significant size” means companies with more than 2,000 employees.

In addition, it is proposed that private companies of significant size, as well as listed companies, should be required (by secondary legislation) to explain how their directors comply with the requirements of the Companies Act to have regard to the interests of employees, suppliers, customers and others.

The intention seems to be that the disclosure should explain the reasons for any departure from any of the provisions in an adopted code or principles. If a company has decided not to adopt a formal code or set of principles, it will be required to explain the reasons.

The Government considers that this should allow companies to identify and adopt the corporate governance framework that suits their business needs most closely, and that the “comply or explain” approach would be proportionate and sufficiently flexible.

It remains to be seen how the FRC will decide to define “companies of a significant size”, and some commentators have expressed concerns about additional perceived “red tape” impeding their dynamism. However, it looks likely that the vast majority of UK SMEs will not be subject to these requirements.

The target is for the new regime to be in place in the summer of 2018.

The Government’s response in full can be found by clicking here.