European Funds Comment: New UK Corporate Governance Disclosures for Private Companies

18 January 2019

In the past, the UK has generally adopted a “hands-off” approach to corporate governance in private companies. It is true that there are some mandatory directors’ duties baked into company law, but these set fairly weak standards and are hard for outsiders to enforce. The rationale, of course, is that corporate governance is largely a matter for the managers and the shareholders to agree and – while in public companies, shareholders may need assistance from regulators to strike an acceptable bargain – investors in private companies can be expected to look after themselves.

But that logic is increasingly less convincing to governments around the world, who regard good governance as playing a part in protecting stakeholders and society more broadly. The UK government apparently agrees and, from the beginning of this year, many UK-based private companies will have to get to grips with new disclosure obligations. (Click here for more details.)

In reality the new rules are not overly prescriptive, but they will affect many British private equity-backed companies. Specifically, “very large” portfolio companies – those with over 2,000 employees or both turnover of more than £200 million (€225m) and a balance of sheet of more than £2 billion (€2.25bn) – face an annual requirement to make detailed public reports on the corporate governance arrangements they have put in place. All “large” companies – those too big to qualify as an SME under the usual European definition, and including “very large” ones – will have an obligation to report on how the board has taken account of stakeholder interests (including, but not limited to, engagement with suppliers and customers) and how certain statutory factors (including the interests of employees) have been considered in the context of the directors’ duty to promote the success of the company. And any company with over 250 UK employees, even if it does not qualify as a large company, must report on its engagement with employees.

Reports are not due until next year, since they must be included in the published accounts for any period beginning on or after 1 January 2019, but the reports will relate to any accounting period that begins (or began) this year, so attention is needed now. The rules only apply to UK-incorporated companies, but they apply separately to each qualifying UK subsidiary (whether or not the parent company is obliged to make a report), and UK parent companies may need to report even where no company in the group qualifies in its own right. And, in most cases, the disclosures must be published on the company’s website as well as included in the accounts.

As we have reported before, the reporting obligation for very large UK companies will oblige them to say whether they follow any corporate governance code and, if so, which one and how it has been applied during the financial year. If the company does not follow any particular code, it must explain why it does not do so, as well as laying out its governance arrangements. The government hopes and expects that most “very large” private companies (and some large ones) will choose to apply the new Wates Principles, which were developed last year for this specific purpose by a coalition of stakeholders that included the BVCA and trade union representatives. These new Principles emphasise (among other things) the central role of the board of directors, the role of the chair, and the need to foster effective relationships with the workforce and wider stakeholders. Training for boards will probably be required to demonstrate compliance, but wider changes to governance structures may also be advisable in some cases. In all cases, private equity portfolio companies and their investors should reflect on the arrangements that are in place and consider how they will make the required reports next year.

Large private companies are increasingly in the spotlight – both for policy-makers and the media – and the deeds and misdeeds of such companies are usually laid at the door of their private equity investors (sometimes even after they have been sold) – whether that is fair or not. But private equity fund managers already understand the importance of effective governance, and usually put in place and then diligently operate sophisticated systems. These new requirements should not herald huge change in the private equity sector, but now would be a good time to review arrangements across the portfolio with these new UK requirements in mind.


BVCA members can access the BVCA’s Technical Briefing on these new requirements here.