UK Leads In Bid To Raise Corporate Governance Standards With Launch Of Code For Large Private Companies
In Brexit Britain, it remains a daily and ongoing struggle to find consensus. But, two and a half years after the collapse of BHS shone a bright spotlight on governance issues in an unlisted business, today’s launch of a voluntary corporate governance framework for large private companies has been widely welcomed by those who helped to draft it, in a collaborative effort.
It marks a move away from box-ticking, setting out to make those who use societal capital and enjoy the privilege of limited liability think hard about their actions and how they fit together into a picture that is acceptable to society as a whole - and requiring them to report on the process from 1 January, 2019.
Six guiding principles for the Code have been defined by a coalition established by the Financial Reporting Council (FRC), the corporate governance watchdog and accounting regulator, and chaired by James Wates CBE, Chairman of the Wates Group, one of the largest privately owned construction, development and property services companies in the UK.
“I believe that good business, well done, is a force for good in society. The Wates Corporate Governance Principles are a tool for large private companies that helps them look at themselves in the mirror, to see where they’ve done well, and where they can raise their corporate governance standards to a higher level” said Mr Wates.
“Good corporate governance is not about box-ticking. It can only be achieved if companies think seriously about why they exist and how they deliver on their purpose, then explain - in their own words - how they go about implementing the principles” he added.
The six principles cover developing societal purpose and defining it through the balance and composition of the board with accountability on the identification of both risk and opportunity. They stress board responsibility for overseeing meaningful engagement with stakeholders including the workforce, and having regard to their views when taking decisions.
In doing so, they place human capital at the heart of the value of a business.
Despite media reports that these principles were set to dodge the continually simmering issue of executive pay - which I covered yet again in my last Governance Watch for a boardroom consultancy - they have addressed it within the context of the business as a whole.
Principle Five on remuneration states: “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.”
Pay and conditions at companies such as Bet365, reported to be the largest private employer in the UK city of Stoke-on-Trent, might be in the spotlight here. Denise Coates, its multi-billionaire founder and boss, paid herself £265m last year in what was a record-breaking pay deal for the CEO of a British company. According to that Guardian report, her pay is more than 9,500 times the UK average salary, but I cannot now add any information here on the context of pay and conditions within Bet365.
The UK’s new mandatory reporting requirements for all large private companies with more than 2000 employees, or an annual turnover of £200 million and a balance sheet of more than £2 billion will concentrate minds however, as the FRC now starts to monitor which companies adopt the code. From 2020, all private companies of this size will need to report their governance arrangements.
Matthew Fell, the Chief UK Policy Director of the powerful business group the CBI, was a member of the group drafting this voluntary code, and welcomed its launch.
“Great corporate governance is the unsung hero of brilliant businesses. Private companies play a major role in our economy and society, so it is important they they are held to similarly high standards as their public-owned counterparts” he said.
“Good governance is an important part of a successful business, and we know that families care about having well-governed businesses. But not all businesses have the structures in place that they need to manage risk and take long-term decisions” said Elizabeth Bagger, Executive Director of the Institute for Family Business (IFB), another member of the coalition welcoming the principles.
Stephen Martin, Director General of the Institute of Directors, a UK business leaders network, said the Wates Principles represented “the start of a new chapter for UK corporate governance.”
In providing this code for large private companies, Britain is making a global statement about the standards it expects from all its businesses. The Principles also make it clear that this is about long-term sustainability for business. At a time when the person on the UK street might well feel that nothing has been achieved in the last two and a half years since Britain’s referendum vote to leave the European Union, it is quite an achievement.
It is worth noting that if the language around executive pay remains measured in these Principles, the emphasis on diversity and inclusion is a critical one, linked as it is to board responsibility for a “process for the identification of future opportunities for innovation and entrepreneurship.”
As such, it’s a wake-up call to all boardrooms in Britain today, as business looks to new opportunities for the future, and plays to its global strengths.
On corporate governance, Britain clearly leads across the world, and is, I believe, the first country to formulate a corporate governance code for large unlisted businesses.
In doing so, it has also become more more closely aligned to South Africa - where corporate governance is rooted in the thinking of Professor Mervyn King and shareholders do not have prime importance, with all companies needing to acknowledge their context by including their stakeholders in their strategic thinking.
An emphasis on governance is critical in 2018 to restore essential public trust in business, as the UK government is well aware. Also, just out, is news that it has taken measures to increase transparency and prevent abuse of limited partnerships, which some criminals have used to launder dirty money through the UK have been unveiled today. The UK government has published its response to the consultation on the reform of Limited Partnership law.
“The UK has always had world leading corporate standards making us a dependable place to invest and start and grow a business. We are committed to continually enhancing our business environment and as part of that we constantly keep under review our governance arrangements – making sure that people have confidence in our corporate standards” said UK Business Minister Kelly Tolhurst.
“These proposals will increase transparency, by ensuring these arrangements can still be used legitimately to invest by pension funds and investors while preventing abuse. The UK is taking strong action in the international fight against money laundering and today’s proposals will increase best practice among businesses” she added.
For anyone still reading, I was delighted to be able to interview Professor King for the Financial Times in 2013, then to write about integrated reporting on Forbes, and to see this opinion piece (with someone I am always delighted to work with, Turid Solvang of Norway’s Future Boards which also hosts this blog on its own website) in the FT the other day.
The world of good thinking is vast, but the best of it is also critically inter-connected, when it comes to corporate governance. Collaboration of ideas and perspectives is key, as this coalition has shown in coming up with the Wates Principles.