New corporate governance reporting requirements

Large private companies will soon be subject to new corporate governance reporting requirements. On 11 June 2018 draft regulations were laid before Parliament. Draft corporate governance principles for large private companies prepared by the Wates Coalition Group have also been released by the FRC for consultation.

What’s involved?

The directors’ report must include a statement (a “statement of corporate governance arrangements”) which states:

  • which corporate governance code, if any, the company applied in the financial year
  • how the company applied that corporate governance code
  • if the company departed from that corporate governance code, the respects in which it did so and its reasons.

If the company has not applied any corporate governance code, the statement of corporate governance arrangements must explain the reasons for that decision and explain what arrangements for corporate governance were applied.

The detailed requirements will be set out in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

Which companies are covered?

These new reporting requirements are likely to apply to all companies that satisfy either or both of the following requirements:

  • the company has more than 2,000 employees
  • the company has a turnover of more than £200 million and a balance sheet total of more than £2 billion.

When do the new rules come into force?

Subject to Parliamentary approval, the new corporate governance reporting requirements will apply to company reporting for financial years starting on or after 1 January 2019.

Will I need to publish the corporate governance statement on a website?

Yes. A company which is subject to the new reporting requirements must ensure the statement is made, and remains, available on a website.

Which corporate governance code should large private companies adopt?

The options are the UK Corporate Governance Code, the QCA's Corporate Governance Code or the draft Wates Corporate Governance Principles for Large Private Companies when they are finalised. This is not a case of one-size fits all. Companies should consider each code and identify which is most appropriate for them.

The succinct nature of the six principles contained in the Wates Corporate Governance Principles for Large Private Companies may make them an attractive choice for many. The principles focus on fundamental aspects of business leadership and performance rather than compliance or mandatory disclosures. Reporting should instead demonstrate how the application of the principles has resulted in improved governance outcomes.

The Wates Corporate Governance Principles for Large Private Companies

These are currently:

  • 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.

When does the consultation close?

The consultation closes on 7 September 2018. If you will be subject to the new reporting requirements we recommend that you consider the questions posed by the FRC and the Wates Coalition Group and provide your feedback to the FRC before then. The aim is to finalise the principles for publication in December 2018, which should align with the introduction of the new corporate governance reporting rules.

New strategic reporting requirement: section 172(1) statement

Companies should be aware that, in addition to the new corporate governance reporting requirements for large private companies, they will be required to include a new “section 172(1) statement” in their strategic report. This statement must describe how the directors have had regard to the matters set out in section 172(1)(a) to (f) when performing their duty under section 172.

The matters set out in section 172 are the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster the company's business relationships with suppliers, customers and others, the impact of the company's operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between members of the company.

Small companies and medium-sized companies will be exempt from the requirement.

What are the next steps?

If this new requirement applies to your company, the first step is to ensure that all directors on your board are aware of section 172 of the Companies Act 2006 and the duty to promote the success of the company. Anecdotal evidence suggests that this is not always the case.

The next step will be to ensure that the statement provides meaningful disclosures which are specific to your company. Boilerplate general disclosures are likely to be criticised and attract adverse comment. There is as yet no guidance as to the form and content of these statements. Best practice will emerge over time as companies balance proper disclosure with confidentiality and other obligations.

The purpose of the strategic report, which is to inform members of the company and help them to assess how the directors have performed their duty under section 172, remains unchanged.

As a first step in considering the form and content of the new “section 172(1) statement” we recommend that companies review the guidance "The Stakeholder Voice in Board Decision Making: Strengthening the business, promoting long-term success” which was published by the Investment Association and ICSA in September 2017.

Subject to Parliamentary approval, the new reporting requirement will apply to company reporting for financial years starting on or after 1 January 2019.