The Government has published its response to the report by the Business, Energy and Industrial Strategy Parliamentary Select Committee following its recent inquiry into corporate governance. The most headline grabbing proposal is that all companies of a significant size (private as well as public) will be required to explain how their directors have complied with their duty under section 172 of the Companies Act 2006 to promote the success of the company. This duty requires directors to have regard to the interests of employees, suppliers and other non-shareholders in their decision making. A draft statutory instrument is due to be published later this year. The Government is not, however, taking forward the recommendation that additional powers be given to the Financial Reporting Council (FRC) to engage and hold directors to account in respect of breaches of this duty.

The Government has also reaffirmed its support for the development of a governance code for large private companies. The code will be voluntary and companies will be able to use other industry-developed codes of governance instead. The FRC will be invited to develop the new code with input from other organisations such as the Institute of Directors and the Institute of Family Business.

All large companies (both private and public) will be required to disclose whether they adhere to any formal code in their directors' reports and on their website. This requirement will initially affect companies with at least 2,000 employees, unless they are subject to an existing corporate governance reporting requirement. The Government is debating whether to extend a similar requirement to LLPs of a similar size

Background

The BEIS inquiry was launched in September 2016 to consider whether there are systemic problems in the way that the existing corporate governance regime operates in the wake of BHS and Sports Direct. For more background on the inquiry, please see our earlier article.

The BEIS inquiry is a separate initiative to the Government's green paper on corporate governance although addresses similar issues. For more on the Government's green paper on corporate governance, please see our article.

Further information