In the wake of recent high profile cases such as BHS and Sports Direct, there are a growing number of calls for changes to the corporate governance regime for large private companies. With almost 11,000 employees, more than 160 stores and a reported pension fund deficit of £571 million affecting some 20,000 pensioners, the collapse of BHS was the biggest high street insolvency since the fall of Woolworths in late 2008 and led to a joint inquiry by the Business, Innovation and Skills and Work and Pensions Committees of the House of Commons. As an unlisted private company, BHS was not subject to the UK Corporate Governance Code (Code). The Code sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. All directors also owe a series of duties under the Companies Act 2006. A number of bodies are now calling for reforms to the corporate governance regime for large private companies. A Commons inquiry on corporate governance has also been launched.
The Institute of Chartered Secretaries and Administrators (ISCA) haswritten to Prime Minister Theresa May to call for changes to the governance of larger private companies in light of these recent high profile cases. ICSA has stressed that the fact a large company is privately owned does not reduce the public impact when it fails. ICSA has called for large private companies to be required to appoint a company secretary as is the current requirement for public companies. This requirement for private companies was only recently removed by the Companies Act 2006 in 2008. ICSA also recommends that large private companies required under the Companies Act 2006 to have audited accounts and to produce a directors’ report should be required to disclose in their annual report the extent to which they comply with the Code.
Commons inquiry on corporate governance
On a similar theme, the Business, Innovation and Skills House of Commons Select Committee has launched an inquiry on corporate governance. Three areas of governance are being reviewed.
- Clarity and transparency: whether there is sufficient clarity around the roles and duties of directors and non-executive directors and whether greater transparency should be encouraged?
- Public and private companies: whether there is potential for greater governance alignment?
- Shareholder interests: how should board decisions be reviewed and challenged?
- Level: is this too high relative to the salaries of more junior employees and should the government seek to influence this?
- Performance: to what extent should pay be linked to performance?
Composition of Boards
- Diversity: how might this be improved in relation to gender, ethnicity, age and socio-economic background?
- Representation: should workers be represented on boards and/or remuneration committees?
The full list of questions is available here. Written submissions can be made until 26 October 2016.
The Institute of Directors (IoD) has written to the Prime Minister calling for a review of their voluntary corporate governance guidelines for unlisted companies. The IoD plans to republish its guidance for directors of unlisted companies in the autumn.
In a separate move, Theresa May has announced plans to put employees and consumers on company boards and to make annual shareholder votes on executive pay packages binding rather than advisory, as a way to make businesses more accountable. More details on these proposals are expected by Christmas.
Further updates will follow as developments emerge.