Corporate governance reforms and the impact for portfolio companies in 2018

New corporate governance requirements will be introduced for large private companies in 2018, in an attempt to rebuild public trust after high profile corporate failures. They include:

• a new corporate governance code for large unlisted companies;
• annual reporting on compliance with that new code or a relevant industry code (on a 'comply or explain' basis); and
• annual reporting on how directors comply with their statutory duty to take stakeholder interests into account when promoting the success of the company.

Who does it affect?

Size thresholds are not yet confirmed, but the Government has indicated they are likely to be: 

• companies with 2,000 employees (reporting on corporate governance compliance); and
• companies with 1,000 employees (reporting on directors' compliance with their duty to take stakeholder interests into account).

New corporate governance code for large unlisted companies

The Financial Reporting Council is currently working with other bodies (including the IoD, CBI and BVCA) to develop a set of broad corporate governance principles for large private and public companies, which will be launched later this year.

Application of these principles will be voluntary, allowing companies to use other industry-developed codes. Portfolio companies covered by the Walker Guidelines for Disclosure and Transparency in Private Equity will be able to continue following their existing approach if desired.

New corporate governance reporting requirement

Large private and public companies will be required by new legislation to disclose their corporate governance arrangements in their annual report and on their website, including whether they follow any code.

The Government's initial view is that this should apply to companies with 2,000 employees or more (and expects this to catch approximately 1,400 companies). A similar requirement may be introduced for LLPs. It is not clear at present whether group employees will be aggregated.

Where a company departs from particular provisions of an adopted code, it will need to identify those areas and give reasons for the departure.

New reporting requirement on compliance with directors' s172 CA 2006 duty

Large private and public companies will also be required by new legislation to explain how their directors comply with the requirements of section 172 of the Companies Act 2006 to have regard to employee and other stakeholder interests and to fostering relationships with suppliers and customers, when fulfilling their duty to promote the success of the company.

The Government envisages that this would include a requirement to explain how the company has identified and sought the views of key stakeholders, why the mechanisms adopted were appropriate and how this information has influenced decision-making.

The Government's initial view is that this should apply to companies with 1,000 employees or more.

Timing

It is anticipated that draft legislation will be introduced in Parliament by March 2018. The Government intends to bring the reforms into effect by June 2018 to apply to company reporting years beginning on or after that date.

What to take away

New statutory reporting obligations will be introduced for large private companies in 2018. This can be viewed as part of a stream of recent new reporting requirements, including payment practices, gender pay and the Modern Slavery Act 2015.

Basing the threshold solely on employees is quite a narrow criteria and one that is not aligned to the criteria for the Walker Guidelines. Once the corporate governance principles for unlisted companies are published, portfolio companies and PE funds should consider what code would be the most suitable for the relevant portfolio businesses, as well as what new policy documents are required to aid compliance.