The Financial Reporting Council (FRC) has published a consultation on corporate governance for large private companies, which aims to address the need for improved transparency and accountability identified in the wake of the 2016 collapse of BHS.
James Wates, chairman of property and construction firm Wates Group, led a group that developed six principles, following the Department for Business, Energy & Industrial Strategy (BEIS) 2016 green paper and the BEIS Select Committee’s report of April 2017.
The principles will not succeed if they are just PR gloss in corporate brochures – firms must bring them to life” –Frances O’Grady, TUC
Wates, chair of the coalition group that developed the principles, said: “Good business well done is good for society. Private companies are a significant contributor to the UK economy, providing tax revenue and employing millions of people. They have a significant impact on people’s lives, and it is important they are well-governed and transparent about how they operate.
“These principles will provide a flexible tool for companies of all sizes, not just those captured by the new legislative reporting requirement, to understand good practice in corporate governance and, crucially, adopt that good practice widely. The principles are about fundamental aspects of business leadership and performance.”
Known as the Wates Corporate Governance Principles, the consultation document is the result of significant debate and exploration, including a review of similar codes for large private companies in other countries.
Big private firms will be encouraged to follow six principles to inform and develop their corporate governance practices and adopt them on an ‘apply and explain’ basis:
- 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 establish oversight for the identification and mitigation of risk.
- Remuneration – A board should promote executive remuneration structures aligned to 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 relationships based on the company’s purpose.
Paul George, FRC executive director for corporate governance and reporting, said: “This work has the potential to help restore trust in business and contribute to long-term sustainable growth in the UK economy. It is therefore important that you respond to the consultation and help in the finalisation of the principles. The FRC is pleased to be working with James as part of the Coalition and in providing the secretariat.”
TUC general secretary Frances O’Grady said: “Private companies affect all our lives. After recent corporate scandals, their standards must improve. We hope lots of organisations will use this opportunity to share their views so that Britain has better businesses, with better outcomes for workers, customers, suppliers and the nation.
“The principles will not succeed if they are just PR gloss in corporate brochures – firms must bring them to life. That means building closer relationships with their workers, customers and the communities where they operate.”
The consultation is open until 7 September 2018.