This update was written by Alyson Whale
Private companies of a significant size will soon be subject to new corporate governance reporting requirements. For the very largest private companies this will include an obligation to disclose their corporate governance arrangements. The Wates Corporate Governance Principles for Large Private Companies (the 'Wates Principles') have been prepared to help companies comply with this new obligation.
The reporting obligations will apply for financial years beginning on or after 1 January 2019, meaning that the first reporting against the new requirements will be in 2020.
What is the new requirement to disclose corporate governance arrangements?
The largest private companies will need to include a statement (a 'statement of corporate governance arrangements') in their directors’ report which states:
- which corporate governance code, if any, the company applied in the financial year
- how the company applied that corporate governance code
- if the company departed from that corporate governance code, the respects in which it did so and its reasons.
If the company has not applied any corporate governance code, the statement of corporate governance arrangements must explain the reasons for that decision and explain what arrangements for corporate governance were applied in the financial year.
Which companies are covered?
This new reporting requirement applies to all companies that satisfy either or both of the following conditions:
- the company has more than 2,000 employees
- the company has a turnover of more than £200 million and a balance sheet total of more than £2 billion.
What do the Wates Principles say?
There are six principles:
- Principle One – Purpose and leadership: An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose
- Principle Two – Board 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
- Principle Three – Director responsibilities: The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge
- Principle Four – Opportunity and risk: A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks
- Principle Five – Remuneration: A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company
- Principle Six – Stakeholder relationships and engagement: Directors should foster effective stakeholder relationships aligned to the board’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
Is there any guidance on how to apply and report on the Wates Principles?
General guidance on how to report is included in the introductory section – companies adopting the Wates Principles should use an 'apply and explain' approach in the way that is most appropriate for their company, after considering each principle in the context of the company’s circumstances. It is recognised that private company corporate governance is not a case of one-size fits all. Each principle is supported by guidance to assist companies in explaining their approach to applying the principle appropriate to their circumstances. The themes covered in the supporting guidance emphasise how the principles interact with each other and should be applied with that in mind.
Reporting should describe, in the company's own words, how the governance practices implemented by the company achieve the principles and desired outcomes. If appropriate, the statement of corporate governance arrangements can cross-refer to information in the strategic report or elsewhere in the company's reports and documents.
Are there any alternatives to the Wates Principles?
Large private companies which are required to prepare a statement of corporate governance arrangements are not obliged to apply the Wates Principles. Other options are the UK Corporate Governance Code and the QCA's Corporate Governance Code. Companies should consider each code and identify which is most appropriate for them. The succinct nature of the Wates Principles will make them an attractive choice. The principles focus on fundamental aspects of business leadership and performance rather than compliance or mandatory disclosures.
Are there any other new corporate governance reporting requirements?
Private companies of a significant size will also need to:
- include a 'section 172(1) statement' in their strategic report
- explain in the directors' report how they have engaged with employees, how they have had regard to employee interests and the effect of that on the business
- provide a summary in the directors’ report of how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others and the impact of that on the company.
The thresholds are different for each of the above new reporting requirements but large private companies which are required to prepare the new statement of corporate governance arrangements will also need to comply with each of the above. Companies subject to the small company accounting regime will not need to comply with the new reporting requirements. Other private companies should take advice to identify which of the new reporting requirements may apply to them.
Other useful reading
The new corporate governance reporting requirements mentioned in this update are set out in The Companies (Miscellaneous Reporting) Regulations 2018. The Department for Business, Energy and Industrial Strategy (BEIS) has published a set of Q&A to help explain the new requirements.
How can Burges Salmon help?
We provide specialist corporate advice to businesses on all aspects of corporate governance. If you would like to discuss these issues, and how they may affect your business, please speak to your usual contact at Burges Salmon or Nick Graves.