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FRC publishes consultation on corporate governance principles for large private companies

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14 Jun 2018

The Financial Reporting Council (FRC) has published a consultation paper on corporate governance principles for large private companies on behalf of James Wates CBE, Chair of the Coalition Group (the Principles).

In January 2018, The Department for Business, Energy and Industrial Strategy (BEIS) appointed James Wates CBE as Chairman of a Coalition Group, comprising members from the FRC, British Private Equity and Venture Capital Association, the Climate Disclosure Standards Board, the Confederation of British Industry, ICSA: the Governance Institute, the Institute of Business Ethics, the Institute of Directors, the Institute for Family Business, the Investment Association, and the Trades Union Congress.  The Coalition Group was established to develop a voluntary set of corporate governance principles for large private companies

The Chairman and the Coalition Group have now issued the Wates Corporate Governance Principles for Large Private Companies for a 12 week public consultation.

The aim to finalise them for publication in December 2018 to align with the introduction of the Government’s new reporting requirement contained within The Companies (Miscellaneous Reporting) Regulations 2018 which were laid before Parliament on 11 June 2018.  This will require UK registered companies with either 2,000 or more global employees or a turnover over £200 million globally and a balance sheet over £2 billion globally to include a statement as part of their Directors’ Report stating which corporate governance code, if any, has been applied and how. If the company has departed from any aspect of the code it must set out the respects in which it did so, and the reasons. If the company has not applied any corporate governance code, the statement must explain why that is the case and what arrangements for corporate governance were applied.

Companies will be able to voluntarily adopt the Wates Corporate Governance Principles for Large Private Companies and meet this requirement.  It is hoped that the Principles will provide a useful tool for a wide range of companies (not just those covered by this new reporting requirement) to understand and adopt good practice in corporate governance. 

The six principles (taken direct from the consultation) are:

  1. Purpose - An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose. 
  2. 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.  
  3. 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.  
  4. 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.  
  5. 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.  
  6. 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.  

A company which adopts the Principles is expected to apply them fully.  Using an apply and explain approach, large private companies are expected to provide a supporting statement for each principle that gives an understanding of how their corporate governance processes operate and achieve the desired outcomes.  The guidance is not intended to be a check-list.  Rather than requiring a compliance and a ‘tick-box’ approach to reporting, adopters of the Principles will be encouraged to demonstrate, through a written explanation in their directors’ report and on their company’s website, how the application of the Principles has resulted in improved corporate governance outcomes.

Responses to the consultation are requested by 7 September 2018.

Please click here for a press release and the Wates Corporate Governance Principles for Large Private Companies on the FRC website.

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