Private Company Governance, one size doesn’t fit all
18 February 2017
The recent BEIS Green Paper on Corporate Governance Reform asks the question “What is the case for strengthening the corporate governance framework for the UK’s largest, privately-held businesses?”
Private businesses represent a significant part of the UK economy, consisting of a vast range of different business models and scale, and many private businesses already voluntarily adopt principles from one of the various Corporate Governance codes available.
On the basis that private companies do not have the same dispersed ownership or separation of management and ownership that listed companies have and, given the enormous diversity of private businesses, the flexibility for those businesses to adopt the guidance (if any) they believe is most appropriate to them must be retained. Care must be taken not to impose a disproportionate burden on private companies, which could discourage investment to the UK, and stifle innovation through well-intentioned but unnecessary increased administrative requirements.
Simply applying the existing same Corporate Governance Code that applies to listed companies to private companies is forcing a square peg into a round hole, and raises the question of who would monitor or enforce the reporting of the comply or explain principles in the same way shareholders do (or should) for listed companies?
Careful consideration does therefore need to be given to the purpose of introducing a private business corporate governance framework, and whether this is distinct from the aim of increasing stakeholder engagement. To raise awareness of the governance practices already adopted by many large private companies, they could be encouraged, perhaps via an update to the FRC’s Guidance on the Strategic Report (which already applies to large private companies), to discuss in their annual report the corporate governance practices they follow and the framework that has been applied, as well as how the Board has identified, engaged with and listened to stakeholders (including employees and pensioners).
To be effective in achieving the aim of raising awareness of the governance practices adopted by private companies, that reporting must be relevant, and clearly linked to the strategic aims, values and purpose of the company.
When considering the implementation of any corporate governance reforms, there must be clarity as to what problem is being addressed. If piecemeal updates are continually made to legislation and Corporate Governance guidance, in reaction to specific and isolated incidents of poor governance, there is a risk that the essence of the UK’s principles based approach to corporate governance may be eroded. Rather than focussing on individual perceived issues, perhaps the focus is better turned to encouraging long-termism more generally, which will naturally lead to improvements in other areas.