The Department of Business, Energy and Industrial Strategy (BEIS) launched a consultation in their corporate governance reform green paper, which closed last month. Broadly speaking, the publicised responses to the consultation so far show an appetite for increased regulation of large private companies. In their response to the consultation, the Institute of Directors (IoD) stated that corporate governance is appropriate for all sizes of business and two thirds of the company directors it surveyed are in favour of a new code of conduct for large privately owned companies, although the IoD acknowledged that these regulations should be less prescriptive than those aimed at listed companies.
Since the economic downturn there has been more pressure to increase transparency around executive pay, employee pension deficits and other corporate governance issues. Before becoming prime minister, Theresa May promised last year that she will work to make businesses more responsible and argued that we need to “get tough on irresponsible behaviour in big business”.
While public opinion may be in favour of a new code of conduct for large privately run companies, questions remain around how this new regulatory regime would work in practice.
For instance, which companies would be covered? The broad consensus seems to be that an expansion of stricter corporate governance rules should be restricted to larger private companies. But how would they be defined? The definition could be based on a number of different factors, including the number of employees or shareholders a business has. Alternatively, it could be judged purely in financial terms on a turnover threshold.
How would a new code be monitored and enforced? The Financial Reporting Council (FRC) has declared itself willing to develop it.
What issues should the code of conduct cover? Would it require private companies to publicly report on or disclose certain information? It will be interesting to see where the government's focus will lie, whether that is in employee related protection, diversity measures or executive pay. We may also see large privately-owned businesses forced to have a number of independent non-execs on their board.
It is unlikely that any new regulations will be as onerous as those imposed on listed companies but nevertheless, it will be interesting to see how far the government is willing to take any new private corporate governance rules.
Of course, many privately-owned companies will already be voluntarily following adapted corporate governance codes, often as they are required by institutional investors, but also as a result of private companies seeing the benefit of good practice and wanting to be seen as a “good” employer.
We could see issues arise with owner-managed businesses which, even with a new corporate governance code, will be difficult to regulate as by their very nature they lack a degree of impartiality.
With Brexit on everyone’s mind it must also be considered how a change in corporate governance will impact the desirability of London as a place to do business.
The current corporate governance regime for UK listed companies is a selling point for investors, making the capital a safer bet for investment. Arguably extending this regime to private companies runs the risk of making the UK over-regulated and uncompetitive compared with the rest of the EU.
Connor Cahalane, partner and Rebecca Bothamley, senior associate in the corporate & securities practice at Mayer Brown