Following its consultation paper in September 2013, Ofwat has recently published its guidance document, “Board leadership, transparency and governance – principles”.
The paper states that although most companies are subject to obligations in Conditions F, K and P of their licences on these issues, the world of corporate governance has moved on and standards have become tighter. Furthermore, greater media attention is focused on board leadership, and customers expect companies, particularly those providing an essential public service, to operate to the highest standards of governance and leadership. In addition, the ownership structure of many of the water companies has changed since these licence conditions were included, with more companies now privately owned and not listed on the Stock Exchange.
The 6 principles set out in the paper are very similar to those in the September 2013 consultation:
- Transparency – open reporting of all material issues.
- Acting as a separate public listed company – the regulated business board must have full control of its decisions (although its parent company may in some circumstances have a legitimate input).
- Independent directors to comprise the largest single group on the board.
- The chair should be independent of management and investors.
- Board committees should operate within the regulated company; this includes (but is not limited to) audit and remuneration committees.
- The group structure must be clearly explained to customers and others.
Water companies must have a code in place by 1 April 2014, and be fully compliant with that code by 1 April 2015. Thereafter Ofwat will consider the way in which it will confirm that companies are compliant; this might take the form of requiring company boards to certify compliance.
In 2015/16 Ofwat will review with companies whether the ring-fencing clauses in licence conditions remain fit for purpose, and may pursue licence modifications if necessary, for example where a company is not meeting the principles.
Alongside its guidance document, Ofwat also published a consultation on the principles for board leadership, transparency and governance in relation to holding companies, stating that in order for regulated companies to operate to the highest standards, holding companies need to do so also. The proposed principles cover three areas, transparency, risk and long-term decision making, as follows:
- The holding company structure should be transparent, and explained in a way that is clear and simple to understand
- The holding company will provide information on debt and equity structures
- The holding company will transparently demonstrate directors’ interests and the nature of those interests (other than where they are declared at the regulated company level)
- The holding company will explain which matters that impact on the regulated company are reserved to the holding company board
- The holding company will transparently demonstrate the governance standards that it applies, including how it meets these principles
- The holding company will not put the obligations and requirements of the regulated company at risk
- The holding company should provide the regulated company with the information that it requests about the activities of the wider group
- The holding company should disclose any issues at the group level which may impact on the regulated company
- The holding company should allow the board of the regulated company to run the business as if it is a separate, public limited company
Long-term decision making
- The holding company should support the regulated company in operating in a sustainable way (including making long-term decisions) in line with the long-term nature of the water sector
These principles build on the requirements contained in Condition P, that regulated companies will obtain an undertaking from their ultimate controller that the latter will (i) provide the regulated business with all information needed to comply with its obligations, (ii) refrain from taking any action which might cause the regulated business to breach any of its obligations, and (iii) ensure that the board of the regulated business contains no less than three independent non-executive directors.
The closing date for responses to the consultation is 7 March 2014.