Published legislation and draft legislation - United Kingdom

Corporate Governance Code for large private companies, out for public consultation

Financial Reporting Council

In June, the Financial Reporting Council put out a new corporate governance code for large private companies ("The Wates Principles") to public consultation. It was prepared by a working group led by James Wates CBE*, in which the FRC and other industry players also participated.

The new Code was written against a backdrop of major reform ago to the corporate governance system, which began several years ago, aiming to strengthen good governance across the country's firms and deepening trust among investors and other stakeholders in the British economy.

The reform is focusing now on large corporations because they account for a major proportion of the country's companies, and because their activity and results have significant impact on employees, suppliers and other players.

The Code contains six principles, backed up by guideline notes on how to apply them, which are based on the recently revised corporate governance code for listed companies that we discussed in issue 14 of Progreso.

These principles are voluntary, so the companies that decide to adopt them will have to explain how they have done so, or else the reasons that have led them not to follow a particular recommendation, if this is the case. We provide a brief summary below, although the definitive version of the Code will not be published until December 2018:

Purpose

An effective Board of Directors must define the company's purpose clearly and ensure that this definition is aligned with its values, strategy and corporate culture.

  • These values should be a reflection of the behavior expected from those in the company and should be integrated throughout the business' functions and operations, specifically in the roles of internal audit, ethics, compliance and risk management.
  • The strategy must be designed to create value that is sustainable over time; it is the Board's responsibility to make sure it is rolled out through the entire organization.
  • Corporate culture –defined as the combination of values, attitudes and behavior of an institution in its operations and relationships with stakeholders– is key in creating and protecting long-term value.

Composition

The Board of Directors should have a balanced mix of skills, experience and expertise; its size will depend on the scale and complexity of the company's activities. In particular, the document stresses that:

  • The Chair leads the Board and is responsible for its effectiveness.
  • A good balance of profiles, aptitudes and experience encourages strategic decision-making, diversity, accountability and objectivity.
  • All directors must be capable of demonstrating the value provided by the organ of governance and of showing that their competences are aligned with the needs of the company and its stakeholders. Institutions must be committed to the professional development of their board members, and these must make the most of any opportunity that presents itself to learn.
  • Individual assessment of directors will look at the contribution they make to the work of the governance body.
  • The Board should be able to determine whether its size and structure are appropriate for tackling the institution's strategic needs and challenges. So, it must be big enough to provide a suitable level of analysis, but also flexible enough to foster efficient, effective decision-making.

Responsibilities

The Board must clearly understand its responsibilities and ensure that corporate governance practices are in place that encourage accountability and effective decision-making, making sure that shareholders' roles and responsibilities, those of the Board itself, and those of the firm's senior management have all been clearly defined.

The Board must also be confident that the information with which it has been provided to take decisions is sound. In this way, the institution must ensure that formal procedures have been defined so that control systems and mechanisms work effectively, and that the quality and comprehensiveness of the information given to the Board is reliable and enables the directors to supervise the company's performance.

Opportunity and risk

The Board must work towards the company's long-term success, identifying opportunities to create and safeguard value, and carrying out effective supervision to identify and mitigate risk.

Remuneration

The Board must encourage the creation of remuneration structures that are aligned with the company's long-term success and with its corporate values. It should also establish a transparency policy for these structures that guarantees accountability for all stakeholders.

Stakeholders

The Board is responsible for overseeing the entity's commitment to its stakeholders and for promoting good relations with them. Specifically, every year it must conduct an objective, balances and comprehensible analysis of the company's situation and its future plans and make this available to all its stakeholders.

* The Chair of Wates Group, one of the United Kingdom's largest family-owned construction, real-estate and development companies.