January 17, 2019 Corporate Governance: Large Private Companies
In June 2018 secondary legislation was introduced which looked towards corporate governance reporting for large companies which were not covered by existing requirements. In general this new legislation applies to large private companies, i.e. those not listed on the main stock exchange or AIM, which satisfy one of two conditions:
- more than 2000 employees
- a turnover of more than £200 million and a balance sheet of more than £2 billion
The legislation entitled “The Companies (Miscellaneous Reporting) Regulations 2018” requires qualifying companies to make a disclosure in respect of corporate governance for all accounting periods starting on or after 1 January 2019. Following the ‘comply or explain’ principle, companies covered by the legislation are required to disclose in a directors’ report which corporate governance code they follow and any deviations from that code. Alternatively, if no code is applied in any one reporting period the directors’ report has to explain the reason for the decision not to follow a code and set out corporate governance arrangements followed during the corporate year.
Whilst large private companies are free to adopt any existing code including those set out for FTSE and AIM listed companies it was recognised that a more tailored approach may be required. Accordingly, a coalition group drawn from a wide cross-section of private organisations was set up with the remit of devising a corporate governance code for private companies. That group, chaired by James Wates CBE, launched an agreed corporate governance code for private companies in December 2018.
The Wates code recommends that boards take account of six areas, namely;
- Purpose and leadership
- Board Composition
- Board Responsibilities
- Opportunity and Risk
- Stakeholder Relationships and Engagement
In defining each of these areas the corporate governance code reflects business best practice. For example, under purpose and leadership the requirement is for boards to ensure that values, strategy and culture align with the purpose of the company. Similarly, the requirement to identify opportunities to create and preserve value as well as establishing oversight for the identification and mitigation of risks aligns closely with other governance codes.
Commenting on the launch of the code the business secretary Greg Clark said “I expect to see our bigger private businesses build on the work they are already doing and take action to support and adopt these practical steps to ensure our businesses continue to inspire public trust and confidence.”