'Pandora's Box?' UK Reveals Corporate Governance Principles For Private Companies

Private limited companies in the UK have accounted for over 96% of all corporate body types since 2007 or before the financial crisis, but have not historically been subject to the same level of reporting and accountability requirements as publicly listed companies - until now. Just days after new reporting regulations were laid before Parliament for approval, a set of principles requested by the UK government is being offered as an appropriate framework which can be voluntarily adopted by them on disclosure.

James Wates, who chairs one of the UK’s largest family-owned construction companies, was tasked by Theresa May's government to head a panel to develop new guidelines with the aim of improving transparency and accountability in private companies. This came in the wake of highly visible corporate disasters with a widespread and painful impact on individuals and society such as BHS and most recently Carillion. In an attempt to repair an increasingly  fractured relationship between business and society, the overall reform of thinking on corporate governance  in the UK was extended to developing a code of behaviour for private companies.

That there is going to be such a code is not in doubt - it is expected to take effect in January 2019, says the Financial Reporting Council (FRC).

But, as ever in UK regulation, there is a desire to make it as palatable and self-evident to business as possible, with voluntary principles. As an initiative that has been undertaken at a critical time for the embattled regulator in charge of a coalition of input, it is also quite clearly a diplomatic exercise by a government that has one distracted political eye on the future for UK business post-Brexit.

Much of the rest of the world already looks up to the UK corporate governance code for plcs, and chooses to emulate it. "It is hoped that the (Wates) Principles will provide a useful tool for a wide range of companies (not just those covered by the new reporting requirement) to understand and adopt good practice in corporate governance" says the report released today by the FRC marking the start of a three-month consultation.

"As the UK prepares to leave the European Union, it is hoped the Principles will further promote its reputation as a global leader in corporate governance, by enhancing transparency and accountability within its largest private companies and, ultimately, helping to improve public trust in business" it adds.

There are six core Wates Principles for Large Private Companies, covering: Purpose, Board Composition, Board Responsibilities, Opportunity and Risk, Remuneration, and Stakeholders.

None of them is revolutionary in addressing the issue of public trust in business, and they skate deftly around the issue of executive pay.  Mr Wates is on the record in an interview with the Financial Times in March as always intending that to be the case.

“I believe personally that what we pay our people in private businesses is between us and them. I don’t think we have to be overly transparent on that, because otherwise we’re just putting out a for sale [sign] on good, talented people" he was quoted as saying.

He repeated that view to me in person earlier this week at a private event at London Business School in conjunction with the FRC to encourage dialogue around the release of the Wates Principles. That view was swiftly countered at the time by an FT reader's letter to the editor.

Charles Calderbank, from well-heeled Henley-on-Thames, wrote: "This is a tacit admission that he does not adequately remunerate his talented staff. Assuming staff at his company are paid competitively, publishing their salaries would be quite the opposite of a for-sale sign. He would soon be in receipt of CVs from those less well paid workers at his competitors. A lack of transparency over pay in the workplace can only be of benefit to employers seeking to pay staff of the same ability in the same position different sums."

The code for public companies states that there should be “formal and transparent” procedure around executive remuneration and no director should be involved in setting their own pay.

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

The UK government has talked of this exercise in developing a code for private companies as intended to bring about a 'step change' in the way in which they are run. But the issue of off-the-charts executive remuneration lies at the very heart of the lack of trust between business and society and a sense of 'us' and 'them', the divide.

Nothing in the Wates Principles "overrides or is intended as an interpretation of directors' duties as set out in the Companies Act 2006" says the report. It has also opted for the gentler 'apply and explain' rather than 'comply or explain'.

With an emphasis on the long-term and on a wide range of stakeholders, these principles do widen the focus of corporate governance in a way that is critical for future businesses fit for purpose. But the lack of involvement with a diverse set of younger people in any conversation about business and society is worth noting. It came to mind at a pre-launch event held at a business school in Britain's capital city, London.

Comment at that event was disturbing in terms of how private businesses more widely might respond. There was the man who took great umbrage at having to be transparent, declaring that his business did not want a website....and shouldn't have to have one. In 2018, did he equate a website and transparency with an invasion of privacy?  That is of concern on many levels, including the need for digital transformation.

For anyone concerned about being "caught" by a new code, it applies to all companies with more than 2,000 employees and a turnover of more than £200 million, and a balance sheet of more than £2 billion.

There were suggestions the other evening from those invited to be there that the thinking behind the need for a corporate governance code for private companies is flawed, as the existing code has clearly done nothing to restore trust in business. What struck me was a palpable sense of indignation at the scrutiny of private businesses.

'Pandora's Box' was invoked, a vision of a horror for capitalism facing unwelcome scrutiny on many fronts. Although we associate emotive visual images of demons unleashed by the opening of that 'box' in Greek mythology, it is really just a reference to a process which, once begun, generates many complicated problems.

If the purpose of all this tinkering with corporate governance codes is to mend a rift between business and society we need to focus more on what constitutes 'society' and whether it can be made up of more equal parts, working in harmony.

A report by Grant Thornton in 2017 said 66% of the FTSE 350 were in full compliance of the existing UK corporate governance code. Private businesses could leapfrog that figure, but whether approaching these regulations for private businesses by focusing on whether or not they are "overly burdensome" is the way forward for real change remains to be seen.

At a time when businesses and their working models are changing fast, the TUC is encouraging active involvement in the consultation. "Private companies affect all our lives....the principles will not succeed if they are just PR gloss in corporate brochures - firms must bring them to life. That means building closer relationships with their workers, customers and the communities where they operate" said Frances O'Grady, TUC General Secretary.

The Institute of Directors (IOD), which contributed towards the creation of the principles, took their launch as an opportunity to welcome the emphasis on the need for companies to demonstrate a commitment to the ongoing professional development of their board.