Making large private companies accountable

I’m on my way to the launch of the Wates Principles on the governance of private companies.

 

This process was started by the UK Government in the wake of BHS chair Philip Green’s abandonment of BHS pensioners following his sale of the company having taken huge dividends for himself and his wife while the pension scheme was underfunded.

 

I have long argued that being private does not exonerate a large company from being accountable. I remember doing so over 20 years ago when part of a government committee which was developing company reporting proposals. My argument then and now is that companies’ accountabilities should be proportionate to their impact not their ownership status. So today is a welcome step forward.

 

My main criticism is not of the Wates Principles but of the UK Government which has misjudged the criteria by which it was decided what companies are eligible.

 

I only realised this when Arsenal Football Club bought out its minority shareholders this summer and thus was relieved of any obligation to meet stakeholders at an AGM. ‘Don’t worry’ I reassured the Arsenal Supporters Trust ‘legislation is coming which will require Arsenal to report on its governance and its discharge of its duties under company law’.

 

Wrong. A company like Arsenal, with its massive impact on North London, policing, transport and the future of our national game does not pass the threshold .

 

Only companies with either 2000 employees or a combination a turnover of more than £200million and a balance sheet of more than £2billion must publish a report on their corporate governance. They can either use the Wates Principles or another recognised governance code. Arsenal’s balance sheet is barely half this threshold!

 

I am pleased to have been part of the group developing these principles and look forward to the day when they will apply to all companies with major impacts.

 

To develop the Wates Principles a ‘Coalition Group’ was set up to develop principles that private companies could work to. This process has been administered by the Financial Reporting Council. The coalition consisted of CBI, TUC, Institute for Family Business and many other representative bodies with an interest in the issue. Additionally I was invited to serve on the group as an individual member – representing no one but myself and so free to challenge governance orthodoxy!

 

I welcome the ‘Apply and Explain’ approach adopted here. So much better than ‘Comply or Explain’ which so often degenerates into ‘Comply and Complain’! It means private businesses are challenged to think through the principles rather than mindlessly tick a box.

 

Governance is – or should be – a simple process of keeping the company honest and accountable and thus ensuring it is effectively managed. In the last few years we have all been guilty of making it sound terribly complicated.

 

The Wates Principles largely avoid this trap. They cover

– Purpose and Leadership
– Board Composition
– Director Responsibilities
– Opportunity and Risk
– Remuneration
– Stakeholder Relationships and Engagement

 

Perhaps the most important action point that they prompt for all private company boards is this. The board must be clear about its mandate. Who has elected or nominated the directors and for what purpose. Are the directors clear, and have they discussed with each other and the owners, what is the purpose and what are the values of the company?

 

The mandate is the key to board clarity and clarity is key to good stewardship by the board.

 

You can find more about the Board Mandate as a concept and as a useful process here.

 

In the years ahead there will be more to do to hold all directors accountable in the legal duty to promote the success of the company. The Wates Principles are a welcome step forward.

Leave a Reply

Your email address will not be published. Required fields are marked *