June 2018 saw the production of drafts of The Wates Corporate Governance Principles for Large Private Companies (Principles) the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations), the effect of which is to require larger private companies to report on their corporate governance arrangements. This is a new trend in the UK, where corporate governance and compliance has previously focussed on public companies and recognises that larger private companies can also have an impact on ‘stakeholders’, i.e. employees, suppliers, investors and customers.
They affect two types of private company:
A large company which is a company that meets two or more of the following:
- turnover of > £36 million
- balance sheet total of > £18 million and
- number of employees > 250
A very large company which is a company which is not already subject to a corporate governance requirement and has either (or both):
- > 2,000 global employees and
- turnover of > £200 million anda balance sheet total of > £2 billion
Corporate governance statements
Under the Regulations, a qualifying company (a very large private company or an unlisted public company and their subsidiaries) must:
- produce a statement of corporate governance arrangements in the directors' report which must state either:
- which (if any) corporate governance code (which could include the Wates Principles) the company applies and the reasons for any departure from that corporate governance code
- if the directors have decided not to apply any corporate governance code, the reasons for that decision and explains what corporate governance arrangements have been applied for the financial year, and
- (if unquoted) publish the above statement on its website (maintained by them or on their behalf, identifying the company and providing free and unrestricted access to the statement) as soon as reasonably practicable and keep it available until either:
- the statement for the company's next financial year is made available, or
- if no statement required to be made available for next financial year, the end of the next financial year.
For companies adopting a code for the first time, the Principles are likely to be a favourite, but the alternatives might be the UK Corporate Governance Code (Code) or the QCA Corporate Governance Code though both are more prescriptive and so less attractive. The six draft Principles are:
Though compliance with the Principles is voluntary, they work on the basis of 'apply and explain', i.e. a company cannot simply recite that it complies with them - it must provide a supporting statement for each principle, to show its understanding of its own corporate governance processes and how they achieve the relevant outcomes.
Statement of compliance with section 172(1) of the Companies Act 2006 (CA2006)
All large private companies and unlisted PLCs (including subsidiaries, even where the parent is required to produce a consolidated group strategic report) will be required to include a separately identifiable statement in their strategic report describing how directors have had regard to the matters set out in section 172(1) when performing their duties under section 172.
Although the contents and detail will vary from company to company, the Government has indicated that it should include some, or all, of the following:
- the issues, factors and stakeholders the directors consider relevant in complying with section 172(1) and how they have formed that opinion
- the main methods the directors have used to engage with stakeholders and understand the issues to which they must have regard, and
- the effect of the above on the company's decisions and strategies over the year
The section 172(1) statement must be made available on a website as soon as reasonably practicable.
All companies with more than 250 UK employees (parent companies must look at the number within the group) will be required to explain in the directors' report how the directors have engaged with employees and had regard to employees' interests, and the effect of that engagement (e.g. on the principal decisions taken during the financial year).
Fostering the company's business relationships with suppliers, customers and others
All large private companies will be required to summarise in the directors' report how the directors have had regard to the need to foster business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken during the financial year.
If either (or both) of the strategic report and the directors' report do not contain any of the required information discussed above, each director of the company may be criminally liable and subject to a fine where they either knew it did not contain the required information, or were reckless as to whether or not it contained the information, and failed to take reasonable steps to secure compliance.
Also, if a company fails to post a copy of its section 172(1) statement and its corporate governance statement on a website and (subject to reasonable circumstances preventing it from doing so) maintain it on the website, every officer of the company who is in default will have committed a criminal offence and be liable to a fine.
The final version of the Wates Principles and guidance will be published in December 2018 to align with the coming into force of the 2018 Regulations (on 1 January 2019, for financial years beginning on or after 1 January 2019).
What to do now?
Companies should start to assess whether they need to copy, select a code to comply with or formulate an explanation of what other corporate governance arrangements they already have in place. A review of existing arrangements should be carried out to see if they need to be changed or supplemented, e.g. employee/other stakeholder engagement mechanisms, corporate governance strategies, policies and procedures, director training and board practices.