What are the new rules?

The UK Government is seeking to restore trust in big business by requiring all large companies, whether listed or not, to show that they operate responsibly. To this end, it has published new legislation which will require large UK private companies to:

  • report on their corporate governance arrangements, and
  • explain how their directors comply with their statutory duty to have regard to stakeholder interests

To help private companies apply and report against a suitable corporate governance framework, new voluntary Principles have been developed and published for consultation.

The new rules are part of a wider package of Government corporate governance reforms and the reporting obligations will apply from the beginning of 2019.

Which companies must report?

UK-incorporated companies (but not LLPs) will need to check whether they fall under the relevant tests. Overall, the provisions are designed to catch only large companies, but, confusingly, different tests apply to the different parts of the reporting requirements. For a quick summary, see the box below:

Report on: Which companies are caught?
Corporate governance arrangements

All non-listed UK companies meeting either of two thresholds:

  • 2000+ employees
  • Turnover over £200m and balance sheet over £2bn
How directors when promoting the success of the company took stakeholders into account (required by S.172 CA 2006) - two separate reports

All UK companies unless they meet 2 out of these 3 tests:

  • Turnover under £36m
  • Balance sheet under £18m
  • Fewer than 250 employees
Employee engagement All UK companies with at least 250 UK group employees

Reporting on corporate governance arrangements

Large UK-incorporated privately-owned or private and public unlisted companies will need to include in their annual directors’ reports a statement about their corporate governance arrangements. This must also be published separately on the company’s website and should explain:

  • which, if any, corporate governance code the company applies
  • how the company applies it
  • if the company departs from the code, in which way it departs from it and why it does so

If the directors have decided not to apply any code, the statement of corporate governance arrangements must explain the reasons for that decision and what other arrangements have been applied for the financial year.

Corporate governance in this context means how the management structures of the company (such as the board and its committees) operate, what requirements are imposed on them, how they interact with each other and how they interact with the company’s owners.

Section 172 and stakeholder reporting

Separate reporting obligations require both listed and unlisted companies to make specific disclosures about the company’s interaction with its stakeholders. There are three elements:

  1. A new statement to explain how directors when performing their duty to promote the success of the company have had regard to section 172 Stakeholder factors
  2. A more detailed explanation of how the company has engaged with its stakeholders
  3. Information about engagement with employees,

The Wates Principles

Alongside, and to complement the new reporting obligations, a new set of corporate governance Principles has been published for consultation. These new Wates Principles are high-level and aim to suit private companies better than the codes used by listed companies. Each Principle is briefly expanded on and explained, but there are no provisions which companies must specifically comply with or report against. Companies will still be free to apply other governance codes, but we expect that many will apply and report against the Wates Principles.

Next steps and timing

The first reporting period for a company will be the one which begins on or after 1 January 2019. This means that companies will need to publish their first reports in 2020, at the earliest. But companies will need to start thinking in advance about how to comply.

Watch the video here