Government targets private firms with corporate code

Three darts hitting the bullseye
Tom Herbert
Acting Editor
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The government has tabled proposals for a governance code to bring large private companies in line with their stock market-listed counterparts.

Following increased scrutiny of Britain’s boardrooms after a number of high-profile scandals, including the collapse of BHS, the green paper published today by the Department for Business, Energy and Industrial Strategy (BEIS) proposes to extend parts of the City’s governance code to large privately-owned businesses.

The proposals call on bodies such as city regulator the Financial Reporting Council (FRC) or the Institute of Directors to adapt existing bespoke governance models to suit large, privately-held business with limited liability status.

The guidelines will adapt the existing UK corporate governance code specifically to the needs and challenges faced by privately-held businesses with large workforces, some of which have been acquired by private equity funds borrowed funds.

Under the proposed changes it is envisaged that companies that exceed the 250 employees/£36m turnover large company threshold conditions would have to comply with the new code of practice or explain why they had not in their annual report. Businesses would also be expected to report on diversity, greenhouse gas emissions, and social and community issues.

The current corporate code

The UK corporate governance code, formally known as the “combined code” was introduced in the 1990s following the £1.3bn Polly Peck collapse, and acts as a governance handbook for listed companies, setting standards of good practice in relation to board leadership, remuneration, accountability and relations with shareholders.

The current corporate code is voluntary and is not strictly policed by the FRC or any other body. But companies that do not comply generally have to explain why or risk reputational and investment risk.

The UK is home to approximately 2,600 private companies and 60 LLPs with more than 1,000 employees. These businesses are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies, yet as the discussion paper points out, the consequences when things go wrong can be equally severe for other stakeholders.

Table of organisations

Stop an ‘irresponsible minority’

In a statement to the House of Commons business secretary Greg Clark said that the proposed changes would better protect privately owned companies employees, customers and pension funds from mismanagement.

Commenting on the measures Prime Minister Theresa May said she wanted to stop an “irresponsible minority” of private firms acting badly, and the changes would mean “everybody plays by the same rules”.

The FRC initially recommended the proposals and it is expected the council will also oversee governance rules for private firms.

Shadow business secretary Clive Lewis called the proposals “disappointing”, stating they were so targeted that in future the measures were likely to be known as the “BHS law”. He doubted that if the rules had been in place a year earlier they would have made any difference to what happened at BHS.

Workers on boards not mandatory

The green paper confirmed that prime minister Theresa May will not seek to add mandatory worker representatives on company boards — a pledge she made earlier this year when running for Conservative leader.

This morning Clark told Radio 4’s Today programme that the prime minister wanted workers to be represented, but not necessarily by having an employee on the board as the government did not want to “overturn what has been a successful system which has had the confidence of business around the world”.

Instead the proposals include specifying a non-executive director with the explicit obligation to engage with the workforce, chair a stakeholder panel, report into the board and influence the remuneration committee.

The move came in for sharp criticism from TUC general secretary Frances O’Grady, who called it a “glorified suggestion box”.

No firm pay cap

The proposals stopped short of imposing a firm cap on pay, but instead suggest that shareholders be given annual binding votes on the pay of company executives. This is a tightening up of rules introduced by coalition business secretary Vince Cable in 2013 requiring such a vote every three years.

Another proposal is for companies to publish pay ratios that show the difference in earnings between the chief executive and an average employee.

Finance directors react

One manufacturing FD AccountingWEB spoke to about the proposals described the move to extend the UK corporate governance code to private companies as “adding more red tape when less is needed”. Describing the practical implications he said: “Realistically it will mean that I have to read a 30 or 40 page doc and then codify it.

“As with most of these things it’s well intentioned, but ultimately the majority of businesses work out the minimum amount of detail needed to include and work to that.”

Another finance manager from the financial services sector described it as a “bonanza” for Big Four technical and reporting experts.

“They’re the only people with expertise of advising on the combined code from years of serving the biggest companies,” he said. “They’ve got the knowledge and are desperate to break into the SME and cloud market.

“The 2002 Sarbanes–Oxley Act in the US was intended to punish lazy accounting firms, but what actually happened was that big firms cleaned up from the compliance work around the new legislation. These changes run the risk of doing the same.”


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29th Nov 2016 16:54

As a little addendum Iain Wright MP, Chair of the Business, Energy and Industrial Strategy Committee, has commented on the proposals:

“Private enterprise is crucial to the UK’s future prosperity but our inquiries into BHS and Sports Direct highlighted serious shortcomings in corporate governance which could undermine the future prospects of UK plc" ... "Sound corporate governance shouldn’t be viewed as a hindrance, it should be seen as the basis for good business performance. Executive pay needs to reflect genuine business success, not short-term gain, and corporate governance should demand that both public and private businesses are transparent, accountable and responsible.

"Theresa May entered No.10 with talk on putting workers first by giving them a voice on company boards. Today’s announcement is welcome, but tentatively setting out a range of options in a Green Paper suggests a Government whose resolve may have weakened on getting to grips with corporate governance. As a Committee, we are determined to tackle these questions in our corporate governance inquiry and we look forward to pressing the Secretary of State and others on executive pay and boardroom diversity in our evidence hearings before Christmas.

"On 14 December, the BEIS Committee will be questioning Greg Clark, Secretary of State, on executive pay, corporate governance, and the options set out in the Green Paper as part of an evidence session looking across the business, energy and industrial strategy portfolio.

"On 6 December, the BEIS Committee’s current inquiry on corporate governance holds an evidence session exploring the issue of executive pay. The Committee’s corporate governance inquiry focusses on executive pay, directors’ duties, and the composition of boardrooms, including worker representation and gender balance in executive positions.

"The BEIS inquiry follows on from the corporate governance failings highlighted by the Committee’s inquiries into BHS and Sports Direct, and in the wake of commitments from the Prime Minister to overhaul corporate governance."

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29th Nov 2016 22:10

That sound you hear is Mr Clark is bolting the stable Doors shut while the horse is sunning itself in Monaco.

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30th Nov 2016 09:50

"Sound corporate governance shouldn’t be viewed as a hindrance, it should be seen as the basis for good business performance."

Sounds to me more like an additional overhead cost just at a time when we need UK business to be trying to expand markets-in politics, like comedy, timing is everything-this is poor timing.

It is typical of the sort of kneejerk legislation we get, whilst politicians have mastered how to legislate to control and regulate business they are incapable of working out how to legislate to encourage them to grow; they are incapable of doing anything to encourage enterprise except spending taxpayer money (usually poorly)

As an aside think decimal point in the wrong place in the article or we are really in the ****. Table makes it clearer

On the positive side I have no medium or large clients, quite happy with smaller companies.

"Under the proposed changes it is envisaged that companies that exceed the 250 employees/£3.6m turnover large company threshold conditions "

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05th Dec 2016 09:34

So we have down to the fact that an audit is either meaningless or perhaps not required anymore.

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