Tightened governance should benefit investors in the long-term
Greater efforts to make companies good corporate citizens should prove to be in the best interests of investors.
The latest development is a new code of practice for large private companies called the Wates Principles and developed by a coalition led by the Financial Reporting Council, a body which regulates auditors, accountants and actuaries, and chaired by construction expert James Wates.
They are designed to help improve corporate governance standards and to ensure businesses are not simply run to make a profit.
These principles are relevant to investors for several reasons. First, large private companies could eventually list on the stock market and so adopting good practice now would mean they start life as listed companies with the high standards of corporate governance desired by shareholders.
Second, investment funds are increasingly putting money into private companies and so high governance standards have an impact on investors in these funds.
Third, it could encourage private companies to raise standards and potentially encourage listed companies to also raise their game.
Chris Cummings, chief executive of the Investment Association, says: ‘Private companies are essential players in the UK economy; contributing to productivity, employing millions of individuals and having a positive impact on wider society and economic growth.’
He says the new Wates Principles could ultimately help to build trust and confidence in the UK business community and wider society.
Many of the principles are similar to those adopted by listed companies, namely how to construct a board and define their responsibilities, and make sure pay structures are aligned to the long-term sustainable success of a company.
Perhaps the most important principle covers the area of stakeholder relationships and engagement. It says the board is responsible for overseeing ‘meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions’.
One of the key criticisms for private companies is that they are run to sole benefit of the founders/directors. This can often cause a cultural problem should a company list on a stock market where it must be run in the best interest of all shareholders, of whom there could be hundreds or thousands of individuals.
The Financial Reporting Council will introduce the Wates Principles in January alongside an updated code for companies which have a premium listing on the London Stock Exchange aimed at stamping out short-termism in business culture.
The updated rules will encourage greater board engagement with the workforce to understand their views, plus the need to refresh the board of directors and undertake succession planning, among other areas.
Investors will also get more disclosure on important issues. For example, when 20% or more of votes have been cast against the board recommendation for a resolution, the company will be encouraged to explain what actions it intends to take to consult shareholders in order to understand the reasons behind the result.
Updated views from shareholders and actions taken will then be published no more than six months after the original meeting. In our view all of these steps should be applauded.