Tuesday, July 31, 2018
01:00PM / By
Forthcoming corporate governance reforms for very large private companies could restore trust in British enterprise. Director, in association with law firm Baker McKenzie, analyses the developments and shares insights from a roundtable on the topic.
The demise of retail giant BHS in August 2016 was a watershed moment for the reform of corporate governance in the UK’s private companies.
The downfall of the 88-year-old department-store chain put more than 10,000 people out of work and started a bitter legal dispute over who should bear responsibility for the firm’s vast pension commitments – a case that’s yet to be resolved.
Of course, BHS was not the first big retailer to fail after the financial crisis of 2007-08 – Blockbuster, Comet, JJB Sports and Woolworths had all vanished from the high street in the ensuing years – and it was by no means the largest firm to go under in that period.
Yet, whether it was because BHS’s collapse followed on so closely from that of other much-loved brands, because it was so acrimonious or because the failure seemed to stem partly from BHS’s status as a private company operating under far less scrutiny than a listed plc, it prompted British business to re-examine its claim to be a paragon of corporate governance.
The BHS affair forced private enterprise to ask itself tough questions about a number of thorny issues, including the responsibilities (or lack thereof) of board members in times of crisis, disproportionate executive rewards and the lack of boardroom diversity.
It also led to introspection among politicians and business leaders as to how, given the litany of high-profile failures, British firms could regain the trust of the society they served.
The IoD and a number of other interest groups called on the government to remedy the situation by creating a more formal corporate governance requirement for very large private companies, to go hand in hand with proposed reforms to the UK corporate governance code for premium listed companies.
The government reacted positively, starting a green-paper process that invited the Financial Reporting Council (FRC) to work with the IoD, the Confederation of British Industry, the Institute for Family Businesses, the British Venture Capital Association and others to develop a set of voluntary corporate governance principles for large private companies.
James Wates, chair of the Wates Group construction firm and a long-time advocate of improving corporate governance in the UK, led the project.
“Good business well done is good for society,” he said on 13 June, as the FRC published the Wates corporate governance principles for large private companies for public consultation.
“Private companies are a significant contributor to the economy, providing tax revenue and employing millions of people. They have a significant impact on people’s lives – it is important that they are well governed and transparent.”
A new outlook
The consultation on the Wates principles closes on 7 September and the final document will be published by the end of this year. It will underpin the corporate governance legislation applying to very large private companies.
Although the proposed reporting requirement will initially cover only firms with more than 2,000 employees and/or an annual turnover exceeding £200m and a balance sheet of more than £2bn that aren’t already required to issue a corporate governance statement, the government estimates that it will apply to about 1,700 companies.
And, while the finer details are still being formulated, Paul George, one of the architects of the Wates principles and executive director of the FRC’s corporate governance and reporting division, believes that they have a crucial role to play in the future of British business.
“The underlying point is to get business leaders thinking about how they do business and help them extend the technical judgement they display in their everyday business affairs to corporate governance too,” he said at a recent roundtable discussion on the issue, hosted by the IoD and Baker McKenzie.
Another participant at the roundtable, Charlotte Valeur, non-executive director at Laing O’Rourke, emphasised the wider benefits of such an approach.
“These principles provide a sound basis for the future of business in the UK,” she said. “In my mind, there is no doubt that good governance creates good value – ie, value that’s sustainable and not achieved at the cost of the society in which a business operates.”
And, while the challenges of reforming the operating structure of British business are considerable, George believes that they are well worth taking on.
“The alternative is to do nothing – and that is not an option,” he said. “I believe that embedding these principles into the fabric of UK business will not only restore trust but also result in fewer failed ventures. That has to be our goal. That has to be what success will ultimately look like for those involved in creating these principles.”
The Wates Corporate Governance Principles for Large Private Companies
An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
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.
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.
A board should promote executive remuneration structures aligned to the long-term success of a company, taking into account pay and conditions elsewhere in the company.
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.