"Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place…Corporate governance is therefore about what the board of a company does and how it sets the values of the company, and is to be distinguished from the day to day operational management of the company by full-time executives.” (Code produced in 1992 by the Cadbury Committee)
Corporate governance is a topic that has garnered significant attention in recent years, particularly in light of corporate scandals and high-profile governance failures. Although historically, corporate governance practices have been more closely associated with public companies, there is an increasing recognition of the importance of good governance in private companies.
As noted in our previous blog, the Wates Corporate Governance Principles for Large Private Companies (Principles) were launched in 2018 with the aim of helping companies required to report on their corporate governance arrangements to do so. The Principles consist of six high-level principles that cover key areas of corporate governance, including board composition and responsibilities, purpose and strategy, risk management, remuneration, and stakeholder relationships.
Five years from their launch, we consider how the Principles have been applied by the companies and analyse the key learnings in light of both our experience and the study issued by the Financial Reporting Council (FRC) (in collaboration with the University of Essex) in 2022 based on financial years 2019/2020 (the Study). The Study was carried out to (i) determine which companies falling under the scope of the Regulations provided a corporate governance statement for financial years starting on or after 1 January 2019, (ii) identify how many companies adopted the Principles, and (iii) in cases where companies applied the Principles, evaluate the quality of their reporting by examining the extent of disclosure and identifying instances of good practice.
How do the Principles apply?
The Principles were developed to ensure flexibility and proportionality, taking into account the diverse structures and contexts of companies. Note that the Principles can be used by any company that is voluntarily keen to disclose their corporate governance commitments, even if they are not required to do so. As a result, these Principles were issued with an "apply and explain" approach, empowering companies to adjust their reporting based on their specific circumstances. The Principles offer a flexible framework for companies to report their own practices and policies on corporate governance. Therefore, it is up to them to provide full, accurate and transparent disclosures to their stakeholders.
What are the key learnings?
As the Principles are relatively new, the Study found it difficult to assess their long-term impact and measure their success. However, its findings indicate that the Principles have been well-received, and that companies are, overall, 'embracing the spirit' of them, highlighting some useful learnings.
Number of Disclosing companies
A key measure of success lies in how extensively and effectively the Principles are adopted and put into practice. 454 of the companies studied by the FRC stated they had applied at least one corporate governance code, and 77% of those companies adopted the Principles. This indicates that several prominent private companies in the UK have willingly embraced these Principles and worked towards integrating them into their governance frameworks, suggesting that companies are recognising the Principles' value in furthering good governance.
Extent, quality, and coverage of reporting
It is important to note that the Principles are voluntary. Therefore, the extent, coverage, and quality of reporting may vary across companies. The Study found that while some companies provided specific information, most of them only offered generic statements concerning their corporate governance arrangements aligned with the Principles. Several companies provided general comments on individual Principles but lacked detailed information on their practical application. Nevertheless, disclosures regarding well-established corporate governance practices, such as committee structure, director independence, and lines of accountability, appeared to be more comprehensive. The Study concluded that this could indicate that companies are currently in a 'learning phase' and may gradually enhance their disclosure practices as their corporate governance arrangements evolve over time.
Corporate governance beyond legal requirements
Large private companies can wield significant social and economic influence. Consequently, ESG has become crucial for corporate governance, encompassing environmental, social, and governance factors used by investors to evaluate companies they invest in. It goes beyond listed companies, as the demand for responsible corporate citizenship has surged, prompting their stakeholders to seek greater transparency in companies' ESG credentials. The introduction of the Principles mirrors this evolving landscape, offering companies a valuable tool to also improve and incorporate ESG matters effectively into their corporate governance reporting.
Accurate reporting on corporate governance is equally essential for companies to uphold their reputations. Regular and thorough internal assessments can help to pinpoint vulnerabilities and protect against possible risks. Robust reporting on corporate governance is therefore advantageous for all companies, particularly those in a phase of expansion or those seeking investments or funding. Thanks to the adaptable nature of these Principles, they can be tailored and adopted to suit the scale of any company.
How Brodies can help?
Brodies' corporate team is experienced in advising and training clients (small and large) on appropriate corporate governance arrangements for their business. Please contact any member of the corporate team or your usual Brodies contact for further information.
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