The government is pressing ahead to introduce new reforms to create a stricter corporate governance regime for privately-owned businesses incorporated in the UK, aligning this more closely with the governance rules which already apply to listed public companies.
In addition to the well publicised proposals for public companies relating to disclosure of chief executive pay ratios and stakeholder input, the government has announced that the Financial Reporting Council (FRC) will develop a set of voluntary corporate governance principles for large private companies and new legislation will also require these businesses to disclose their corporate governance arrangements on their website and in reports. Significant reforms are also being proposed in relation to directors' duties to non-shareholder stakeholders.
So what would the proposed changes mean in practice?
Details remain as yet unclear and a number of questions will need to be answered before the new rules comes in (likely mid-2018). The broad consensus seems to be that an expansion of stricter corporate governance rules should be restricted to large private companies.
But how would "large" be defined? This could be based on different factors, such as the number of employees and/or turnover. The government has suggested that the corporate governance code and disclosure requirements could apply to private companies with over 2,000 employees unless they are subject to an existing corporate governance requirements. It is also considering whether these requirements should apply to limited liability partnerships.
Rather than making the existing Corporate Governance Code for premium listed companies applicable to large private companies, the government will task the FRC to work with the Institute of Directors, the CBI, the Institute for Family Business, the British Venture Capital Association and others to develop a new set of corporate governance principles. Although the code would be voluntary, the government proposes to introduce legislation to require all large private companies to disclose their corporate governance arrangements in their annual director's report and on their website.
Also significant is the government's proposal that public and private companies will be required to disclose how their directors are fulfilling their statutory duty to act in a way that promotes the success of the company, which includes having regard to long term considerations, the interests of employees, suppliers, customers, the community and the environment. The government hopes that a formal disclosure requirement will lead to directors thinking more carefully about how they are taking such matters into account.
The Prime Minister's election promise to crack down on big business has given impetus to this push for additional regulation of privately-owned companies. Many will already be voluntarily following adapted corporate governance codes, often as they are required by institutional investors, but also as a result of private companies seeing the benefit of high standards in corporate governance and a desire to be seen as a good and reputable businesses. For many private companies, these new rules will not dramatically change how their business is run.
So where do the difficulties lie?
First, owner-manager businesses, no matter how large, could still present an issue and regulation under a new corporate governance code could prove tricky as, due to the very nature of these companies, there is a lack of impartiality which could make reporting complicated.
Brexit is a factor here too, as it will be in all businesses' decision-making for the foreseeable future. Currently the UK's corporate governance regime is seen as a positive by many international investors – it indicates a fair and transparent system which helps ensure London has one of the world’s leading equity markets.
However, burdening privately-owned businesses with additional requirements runs a risk of making London and the UK appear over-regulated and uncompetitive when compared with other financial centres. Although the initial changes announced by the government do not appear to be pushing too far in that direction, it should be an important consideration for the government when taking these proposals forward.