In light of the extraordinary governance failures displayed in the sale of BHS and the subsequent dual enquiries from U.K. government select committees, the Institute of Directors (IoD) announced that it would be reissuing its governance guidance for private companies.
The previous guidance is a little difficult to track down, since it has been taken down from the IoD website, but it appears that the new guidance will largely be a reiteration and confirmation, rather than a redrawing of the principles.
IoD's 2010 Private Company Corporate Governance Principles
Phase 1 principles: Corporate governance principles applicable to all unlisted companies
Principle 1: Shareholders should establish an appropriate constitutional and governance framework for the company.
Principle 2: Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board.
Principle 3: The size and composition of the board should reflect the scale and complexity of the company’s activities.
Principle 4: The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with appropriate information.
Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully.
Principle 6: The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.
Principle 7: There should be a dialogue between the board and the shareholders based on a mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.
Principle 8: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
Principle 9: Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.
Phase 2 principles: Corporate governance principles applicable to large and/or more complex unlisted companies
Principle 10: There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business. No one individual should have unfettered powers of decision.
Principle 11: All boards should contain directors with a sufficient mix of competencies and experiences. No single person (or small group of individuals) should dominate the board’s decision-making.
Principle 12: The board should establish appropriate board committees in order to allow a more effective discharge of its duties.
Principle 13: The board should undertake a periodic appraisal of its own performance and that of each individual director.
Principle 14: The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders, and establish a suitable programme of stakeholder engagement.
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“The intention is to publish updated guidance in November, but it is unlikely to vary much from the existing guidance,” said Oliver Parry IoD’s head of corporate governance. “A small steering committee was set up that has been reviewing the guidance over the last two months, but the current principles as is seem fit for purpose.” References to the OECD governance principles and the Bribery Act will be updated. “It will still be voluntary guidance, not a code. Frankly, given the millions and millions of private, unlisted companies, it would be almost impossible to develop a code to cover all of them. After all, the U.K. Corporate Governance Code covers only 350 companies.”
“With guidance, of course,” continued Parry, “you can ignore it but we are telling most private businesses that they need to follow it. And the larger the business, the more seriously they need to take governance. We’re not aiming this at small, family-owned businesses of say quarter of a million turnover, but we are aiming it at companies with £35 million and up. Of course, if you are a small business and you want to attract investment, you’d be well advised to adopt the principles. Investment goes to well- run companies.”
In the foreword to the 2010 guidance, then director general of the IoD, Miles Templeman, noted that of the United Kingdom’s 2.6 million registered companies, most are private. “The overwhelming majority are SMEs or start-up companies that remain under the ownership and control of the founder or founding family.” Because of the huge size of the private sector, it contributes massively to U.K. GDP and, consequently, if it fails, it could have a dramatic effect on the U.K. economy. The 2010 document gives fourteen principles of good governance for unlisted companies that take into account the size of individual enterprises, and applies in a two-phase approach. The first iteration of the guidance was developed by European Confederation of Directors Associations (ecoDa), which put together the original European text from which this U.K. edition has been adapted.
Parry noted that the chairs of the parliamentary select committees focussed on business were both very interested in corporate governance and that, given the recent BHS enquiry, he would not be surprised if the government looked pretty closely at private companies. “The unlisted sector is a great unknown, and if the government is going to do something about governance it should prioritise, with the unlisted sector at the top of the list,” he said. Given that it is 10 years since the Company Act and almost 25 years since the Cadbury Code, Parry felt that a complete overhaul/overview of corporate governance was probably due.
Indeed, one of the conclusions of the recent Business Information and Skills (BIS) Committee inquiry into BHS noted: “but if large public or private companies do not behave in accordance with the ethical standards that society expects, further regulation may need to be considered.”
BHS Inquiry Conclusion
This inquiry has exposed how capitalism can be worked to the advantage of directors, financiers and advisers at the expense of employees and the wider public interest. This deeply concerning example of corporate governance brings into question the adequacy of existing company law and corporate governance regulation, particularly in relation to large private companies. That private companies are not subject to the same transparency requirements and codes of conduct as their public counterparts in no way absolves them of their wider responsibilities. Parliament is rightly cautious about imposing onerous new duties on our companies; but if large public or private companies do not behave in accordance with the ethical standards that society expects, further regulation may need to be considered. Ultimately business has a moral responsibility to operate within a framework which enjoys the confidence of the nation. These are issues to which the Business Select Committee will look to return.
Nothing has been definitively announced, however, from the BIS committee about the form of the inquiry, except that it will cover a wide list of corporate governance topics, and will not be restricted just to private companies. It seems that the kinds of topics that will be covered will arise from some of the more major problems that were identified in the BHS inquiry, including the fact that the non-executive chairman Lord Grabiner was unaware that a board meeting regarding the sale of the company was taking place, or that Goldman Sachs was richly rewarded for basically rubber stamping a deal it had not properly investigated. In addition, the ability of very powerful individuals, such as Mike Ashley CEO of Sports Direct, another BIS inquiry subject, to ride roughshod over laws and regulations without being challenged by the board is likely to be investigated more widely.
It will be interesting to see how the conclusions of the inquiry, when they are forthcoming, will fit in with the government’s governance agenda, but, according to internal select committee sources, it is likely that the conclusions will not seek new laws and regulations but will seek to strengthen the codes and practices already in existence, particularly as regards boardroom structures.
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