A public consultation published by the Financial Reporting Council (FRC) has set out proposed new corporate governance and reporting principles for large private companies in the UK. New reporting requirements will apply to financial years beginning 1 January 2019 with reporting to start in 2020. The new rules form part of the continued drive by the government towards greater corporate transparency.

The consultation sets out six ‘Principles’, known as the Wates Corporate Governance Principles for Large Private Companies, which have been developed following last year’s Green Paper, and a BEIS Select Committee report of April 2017, which considered the need for improved corporate transparency and accountability.

The FRC Consultation quickly followed publication of draft legislation for implementing various corporate governance reforms, notably the annual requirement for some large companies to disclose their corporate governance arrangements, and stakeholder interests.

Large private companies will be encouraged to follow the Principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis.

What are the six Principles?

  1. Purpose. An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

The Consultation includes useful guidance on each Principle, as well as examples of how one of the Principles (3) may work in practice.

Will it affect my company?

The new rules and proposed Principles are aimed at UK-incorporated ‘Large Private Companies’. This means they will apply to all companies (but not LLPs) that do not have an existing corporate governance reporting requirement, and satisfy either or both of the following conditions:

  • more than 2000 employees
  • a turnover of more than £200 million, and a balance sheet of more than £2 billion

Companies will be able to voluntarily adopt the Wates Principles as their framework when making a disclosure about their corporate governance arrangements under the new statutory reporting requirement.

For smaller private limited companies the Principals should be used as a guide and framework for their own board even though they will not be required to make the disclosures under the new statutory reporting requirement, as the Principals.