With the aim of improving transparency and accountability across the UK's corporate landscape, large companies incorporated in England and Wales will, by 1 January 2019, have to put in place various new governance arrangements.

Firstly, what is a "large company"?

Answered simply, it varies depending on the relevant governance initiative. Beneath each initiative below we have listed who falls within its scope. Note that the company does not need to be a public company or one that is listed. The initiatives apply equally to private companies, provided they meet the thresholds outlined.

Initiative 1 – Engaging with employees

For financial years beginning on or after 1 January 2019, all companies with an average number of more than 250 employees in the UK will need to disclose in their directors' (or strategic) report how they have:

  • shared with employees systematically information of concern to them as employees;
  • consulted with them (or their representatives) regularly in order to factor their views into company decisions likely to affect their interests;
  • encouraged employee involvement in the company's performance (e.g. through employee share schemes); and
  • sought to achieve employee awareness of financial/economic factors affecting the company's performance.

Additionally, an affected company will need to summarise how its directors have engaged with employees, have had regard to employee interests and the effect of that regard on the company's principal decisions taken during the financial year.

Where an affected company complies with the UK Corporate Governance Code (in its new form published in July 2018), it should be mindful that this suggests one or a combination of the following methods be used for gathering employee views (if none are adopted the company should explain what alternative arrangements are in place):

  • designating a non-executive director to do this;
  • establishing a formal workforce advisory council; or
  • appointing a director for the workforce.

The use of the word "workforce" rather than employees is deliberate – seeking to capture self-employed contractors, workers and agency workers, as well as employees.

Initiative 2 – Engaging with customers and suppliers

For financial years beginning on or after 1 January 2019, all companies who meet at least two of the following thresholds:

  • turnover of more than £36 million;
  • balance sheet total of more than £18 million; and
  • more than 250 employees.

will need to disclose in their directors' (or strategic) report how they have had regard to the need to foster the company's business relationships with suppliers, customers and others and the effect of that regard on the principal decisions taken by the company during the financial period.

Initiative 3 – Promoting the company's success

For financial years beginning on or after 1 January 2019, all companies who meet at least two (the same thresholds as initiative 2) of the following thresholds:

  • turnover of more than £36 million;
  • balance sheet total of more than £18 million; and
  • more than 250 employees

will need to explain in their strategic report (and publish on their website) how their directors comply with their duty under the Companies Act 2006 (section 172) to promote the success of the company having regard to employee and other stakeholders' interests. It is envisaged that this new reporting regime will include a requirement to explain how the company has identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has informed decision-making in the boardroom.

The Financial Reporting Council (FRC) is revising its Guidance on the Strategic Report and has agreed to include guidance to help companies decide how to report.

Initiative 4 – Comply with a governance code or explain

For financial years beginning on or after 1 January 2019, all companies (save for those already subject to an existing requirement) who, on their own, have either:

  • 2,000 or more employees globally; or
  • a turnover of more than £200 million globally and a balance sheet over £2 billion globally

will need to disclose in their strategic report (and publish on their website) if they apply a corporate governance code and how they comply with or depart (with reasons why) from that code. If they don't apply a code, their strategic report must explain why this is the case and the governance arrangements they implement instead.

There is no definitive list of governance codes which can be applied, although the Quoted Companies Alliance Code and UK Corporate Governance Code (UK Code) are established benchmarks. Directors will need to carefully compare governance codes to assess which works best within their structure and operations. The FRC has recently commissioned a coalition group to develop corporate governance principles specifically for large private companies. The resulting draft principles (see below) have been published for market feedback and the consultation period will close on 7 September 2018. Following these principles will be voluntary but it is hoped they will "serve to raise awareness of good practice and, over time, help to improve standards of corporate governance in private companies, large and small".

All companies who, individually, meet the thresholds above will be required to comply or explain. This includes subsidiaries of listed companies required to meet the UK Code and subsidiaries of parent companies who prepare a consolidated group directors' report. It may be that a subsidiary meets the thresholds when its parent does not. There will be times when a company's size varies year on year and below the relevant qualifying thresholds. In such a situation, there are "smoothing" provisions explaining what a company should do (The Companies (Miscellaneous Reporting) Regulations 2018 - Q&A provides useful examples).

Initiative 5 – The Wates Corporate Governance Principles

As noted above, corporate governance principles specifically designed with large private companies in mind are in the process of being finalised (scheduled to be published in December 2018). The expectation is that these principles will be widely adopted and become a commonly used code of practice for a broad range of private companies, including (but not limited to) those who have to meet the new reporting requirement at Initiative 1 above. These principles are not intended to displace existing codes and guidance if they are considered more appropriate to the company concerned e.g. the BVCA's principles for private-equity backed companies.

As currently drafted, there a six proposed principles capturing the following:

  • Purpose of the company
  • Effective board composition
  • Board responsibilities
  • Opportunity and risk
  • Executive remuneration
  • Engaging with stakeholders (including the company's workforce)

It is envisaged that companies adopting the Wates Corporate Governance Principles should provide a short supporting statement for each principle explaining how it has been applied to achieve better outcomes.

Next steps

The initiatives above are clearly aimed at large companies (both private and public) whose existing corporate governance framework is relatively informal and opaque. The obligation to "comply or explain" with a corporate governance code (even if the company is not listed) shows the government's focus on a gold standard of governance and large companies should take seriously the reforms coming into play. They need to review their corporate governance frameworks to establish if any changes will be needed to comply, monitor announcements from the Department for Business, Energy and Industrial Strategy and the FRC and look out for practical guidance to be published by groups such as the GC100, ICSA and the Investment Association.

The timing of these new initiatives is such that reporting in the directors' or strategic reports will effectively start in 2020 for the previous year. However, this does not negate the need to comply with its provisions during the relevant year. Where website publication is required (Initiatives 3 and 4) the required information will need to go live on 1 January 2019.

For companies incorporated in England and Wales and also listed on AIM, not only do they need to consider the above but also the incoming changes detailed in our insight. For AIM companies, the requirement to "comply or explain" with a code actually takes effect from 28 September 2018 (three months earlier than for "large" companies).