In our Corporate Law Update for the week ending 9 February 2018, we reported that James Wates CBE had been appointed to chair a Coalition Group to implement the Government’s recommendation of producing a code of corporate governance for large private companies.
The Financial Reporting Council (FRC), on behalf of the Coalition Group, has now published for consultation a set of proposed principles of corporate governance for large private companies, called the “Wates Corporate Governance Principles” (the “Principles”).
The consultation follows the Government’s publication last week of draft regulations that would require very large unlisted companies, for financial years beginning on or after 1 January 2019, to choose a corporate governance code and to explain the extent to which they comply with it.
The Group has designed the Principles specifically to enable companies to report against them and so satisfy this requirement. However, the paper states that companies adopting the Principles will be expected to apply them fully, explaining how their processes work to achieve the desired outcome of each Principle and how applying the Principles has resulted in improved corporate governance.
The six Principles are:
- Purpose. An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
- 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.
- 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.
- 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.
- 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.
- 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 proposed code also contains guidance on each of the six Principles, and, by way of illustration, the consultation paper provides examples of how a family-owned company, a private equity-owned company and a listed company could apply proposed Principle 3 respectively.
The FRC has asked for responses by Friday, 7 September 2018.