Government Targets Private Firms With Corporate Code

The Government has tabled proposals for a governance code to bring large private companies in line with their stock market-listed counterparts.

Following increased scrutiny of Britain’s boardrooms after a number of high-profile scandals, including the collapse of BHS, the green paper published today by the Department for Business, Energy and Industrial Strategy (BEIS) proposes to extend parts of the City’s governance code to large privately-owned businesses.

The proposals call on bodies such as city regulator the Financial Reporting Council (FRC) or the Institute of Directors to adapt existing bespoke governance models to suit large, privately-held business with limited liability status.

The guidelines will adapt the existing UK corporate governance code specifically to the needs and challenges faced by privately-held businesses with large workforces, some of which have been acquired by private equity funds borrowed funds.

Under the proposed changes it is envisaged that companies that exceed the 250 employees/£36m turnover large company threshold conditions would have to comply with the new code of practice or explain why they had not in their annual report. Businesses would also be expected to report on diversity, greenhouse gas emissions, and social and community issues.

The current corporate code

The UK corporate governance code, formally known as the “combined code” was introduced in the 1990s following the £1.3bn Polly Peck collapse, and acts as a governance handbook for listed companies, setting standards of good practice in relation to board leadership, remuneration, accountability and relations with shareholders.

The current corporate code is voluntary and is not strictly policed by the FRC or any other body. But companies that do not comply generally have to explain why or risk reputational and investment risk.

The UK is home to approximately 2,600 private companies and 60 LLPs with more than 1,000 employees. These businesses are not expected or required to meet the same formal corporate governance and reporting standards as publicly listed companies, yet as the discussion paper points out, the consequences when things go wrong can be equally severe for other stakeholders.