On 17 February 2017, consultation will close on the government's green paper on corporate governance reform.
The green paper requests feedback on suggested ways to address the long-running controversy over executive pay packages and the sometimes estranged relationship that can develop between a board and its company stakeholders due to a lack of transparency and involvement. While these issues have traditionally been focused towards publicly listed companies, the green paper acknowledges that the UK is home to a significant number of large, private companies where failure to observe good standards of corporate governance can have equally destructive consequences.
The green paper therefore introduces a key point for consideration: Should corporate governance in large privately-held businesses be tightened?
In the wake of a raft of high-street scandals, it is accepted that more than just the owners and managers have a vested interest in the way in which a company is run. A well-managed company not only keeps shareholders happy but also looks after its employees, pension fund beneficiaries, suppliers, customers, clientele and, in turn, its reputation.
How should private company governance be achieved?
The UK's Corporate Governance Code (the Code) currently applies to all companies with a premium listing in the UK. It sets out good governance practice on issues such as board composition and effectiveness, the role of board committees, risk management, remuneration and relations with shareholders. The green paper invites comments on the merits of extending the Code to large privately-held companies or of delivering a more tailored approach.
The paper further questions whether any new corporate governance requirements should be introduced by mandate or through voluntary compliance. Whilst legislation ensures greater compliance, it risks companies interpreting rules mechanically rather than using them to drive real organic change. On the other hand, the Institute of Directors' Corporate Governance Guidance, whose 14 key principles largely mirror the Code, has been published for a number of years but it remains unclear how many companies choose to implement them. This then leads to the question of how such governance, if voluntary, would be monitored.
What areas should corporate governance target?
In a bid to 'reform capitalism', prime minister Theresa May set up an enquiry into corporate governance. The enquiry is still in the oral evidence stage but some of the issues aired in the evidence sessions reveal a range of areas that could impact reform of corporate governance in large privately-held companies, including:
- Diversity: boards are often a homogenous group of people leading to a tendency to share the same views and ways of thinking. This risks ignorance to important issues concerning stakeholders, employees and corporate responsibility
- Board election: as directors are elected internally, they are not independent. Electees often feel that they 'owe' their position to their peers and so are less likely to challenge controversial issues, such as executive pay or investment decisions
- Over regulation: this can impact upon decisions to make profitable investments and may reduce the pool of talent for those who run companies as it is recognised that many people can be put off by the level of compliance required
- Transparency: increased accountability of directors to their stakeholders through their duties under s.172 Companies Act 2006
What should define a 'large' private company?
As private companies can range from a 'one member/one director' set-up to those consisting of a full board of directors and a membership akin to public companies, it is clear that certain new corporate governance regulations will not be appropriate for smaller companies. But where do you draw the line?
In light of the raison d'être of the green paper, perhaps consideration of the number of shareholders and directors, size of the workforce and/or the size of responsibilities will be more appropriate than a purely financial measure.
We will continue to monitor developments in this area.