Boards

All you need to know about proposed new corporate governance principles

Checklist-01This week, the Financial Reporting Council published a consultation on corporate governance principles for large private companies.

We examine what the principles propose, and how they might affect boards of large corporates.

Why were the new principles developed?

Following the highly-publicised failing of BHS and the implications for its pension scheme, the Government asked James Wates, chairman of construction company Wates, to carry out a review of corporate governance. In particular, it wanted to look at the need for increased transparency and accountability.

Wates chaired a coalition group tasked with developing corporate governance principles for large private companies; the resulting paper represents five months of work by that group. The proposed principles are now open for consultation until 7 September 2018.

Launching the principles, Wates said:

‘Private companies…have a significant impact on people’s lives, and it is important they are well-governed and transparent about how they operate…The principles are about fundamental aspects of business leadership and performance.’ 

What are the six principles of corporate governance?

The six 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 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.

Taking steps to adopt the principles

The principles may still be out for consultation, but it’s pretty certain that they will be adopted in some form. Companies can get one step ahead by identifying how they can put them into practice.

To some degree, they should all be ‘business as usual’ already. Here we look at each of them and some of the practical steps you can take to align your company with them.

  • As we have outlined previously, the board is the lynchpin in your firm’s purpose and strategy. It is also central to driving a corporate culture that promotes good governance and ethical behaviours. However, with a report earlier this year suggesting that boards are failing when it comes to improving corporate culture, it’s an area where you might want to re-assess your approach.
  • Composition – again, having the ideal mix of directors is something we’ve looked at before. Having a balance of skills and experience is essential; a diverse board enables the right amount of debate and allows you to make the best decisions. Find out what the most important qualities in a board member are and whether you have the ideal mix of perspectives in your boardroom.
  • The board needs to have clear accountability, terms of reference and policies; this is essential to a well-run business. For this to happen, all directors need to be able to access the information they need – whether that’s past papers, corporate documents or board policies.
  • Opportunity and Risk. Again, this balance is something we’ve explored before, in our blog, Do your directors focus on risk, not success. Make sure your board gets the balance right between maximising opportunities and mitigating risks.
  • Your directors should promote executive remuneration structures that support the organisation’s long-term success. Make sure they are aligned with pay and conditions elsewhere in the firm.
  • Stakeholders – engaging with the company’s stakeholders is one of the key functions of the board. These stakeholders include not only shareholders and external stakeholders, but the company’s workforce too. All need to be borne in mind when making decisions.

What happens next?

The consultation is open until 7 September 2018. If you want to respond, you need to send your feedback to corporategovernanceprinciples@frc.org.uk.

The final version of the Wates Principles for Corporate Governance will be published in December 2018.

Re-examine your own corporate governance – and drive efficiency improvements too

With culture and good governance top of the agenda for regulators and businesses, these new corporate guidelines are no surprise. Ethical performance is increasingly valued – and increasingly visible.

If you want to find out how one organisation improved efficiency, saved money and improved their own performance, you might want to read our case study. It outlines how Scottish Building Society’s new approach to board papers improved more than just their meeting packs. You can download a free copy here.

Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.

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