Corporate governance principles for private companies published

New corporate governance principles for large private companies have been published by the Financial Reporting Council (‘FRC’), including a call on boards to undertake ‘meaningful engagement’ with material stakeholders.

The six new principles have been developed as a result of a review undertaken by James Wates, chairman of construction company Wates. The review was ordered by the government in the wake of the scandals at high street retailer BHS.

In a statement Wates said:

“These principles will provide a flexible tool for companies of all sizes, not just those captured by the new legislative reporting requirement, to understand good practice in corporate governance and, crucially, adopt that good practice widely. The principles are about fundamental aspects of business leadership and performance.”

The principles come in the same week that new legislation is laid before the UK Parliament imposing new reporting requirements on private companies.

As of 1st January 2019, large private companies will be obliged to report which governance code they follow, how the code has been applied, and whether the company has departed from any provisions of the code.

The reporting demands apply to companies with either more than 2,000 employees or a turnover of more than £200m, and balance sheet net assets of more than £2bn.

The Wates principles are:

Purpose: An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.

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.

Responsibilities: A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.

Opportunity and Risk: A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establish oversight for the identification and mitigation of risk.

Remuneration: A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.

Stakeholders: A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good relationships based on the company’s purpose.

A consultation on the Wates principles is open until 7 September. An agreed code is expected by December this year.