Building Trust in UK Business
If you are looking for, or really need, a breather from Brexit you have come to the right place. Whilst the Brexit process and political situation has taken up a huge amount of bandwidth in Whitehall, the UK government department responsible for business (BEIS - Department for Business, Energy and Industrial Strategy) has been working on other areas that affect UK companies and M&A. I have been referring to this recently as the Building Trust in Business agenda and this is not aimed at the private equity industry, but the business community more broadly in the United Kingdom.
There have been a number of large business failures in the United Kingdom over the last couple of years (including large private companies) that have attracted significant press and political attention. The emphasis has been on the impact of these failures on employees, pension fund beneficiaries and other stakeholders such as suppliers and contractors. Ineffective corporate governance is considered to be one of the root causes of these failures and the government has looked into this area, alongside other aspects of corporate law, to see if policy changes are required.
The government has now introduced additional reporting requirements for private companies in the United Kingdom. Large companies will need to report on how directors have complied with their duty to have regard to matters set out in section 172 of the Companies Act 2006. Additionally, companies may need to report on their engagement with employees, as well as other stakeholders, such as suppliers and customers. Very large companies will also need to cover their corporate governance arrangements. These additional disclosures will be required in companies’ annual reports, and for some areas on the company website, for financial years beginning on or after 1 January 2019. Now would be an opportune time to start preparing for these changes.
At this point, you’re probably thinking that learning about more reporting requirements does not sound like a welcome reprieve from Brexit. The good news is that the law on directors’ duties has not changed and the requirements are not as extensive as those that apply to listed companies. More importantly, when the government commenced its work, it recognised the efforts of the private equity industry through initiatives like the Walker Guidelines. The BVCA was then invited to join a coalition including the FRC, CBI, IoD and TUC to develop a corporate governance framework for large private companies and the Wates Principles were published in December 2018. The industry’s involvement in these reforms reconfirms the government’s recognition that private equity and venture capital investment is a vital part of the UK economy and any new rules or changes need to accommodate us.
The industry has also been a key influencer in shaping policy related to other aspects of the Building Trust in Business agenda that impacts M&A. The detailed legislation related to the areas below is being developed and firms should be aware of the areas under consideration.
The UK government is also consulting on changes to law to protect defined benefit pension schemes, including reviewing The Pension Regulator’s powers. The government’s response to date recognises our feedback on the need to find the right balance between the legitimate interests of shareholders, business needs and the protection of pensions, reiterating that clarity is vital for investors. In addition, sanctions for individuals need to be proportionate to the perceived wrongdoing.
We have succeeded in encouraging BEIS and The Insolvency Service to improve the initial proposals aimed at increasing the accountability of directors of group companies when selling subsidiaries in distress. The government acknowledges that new measures should not disincentive rescues or unnecessarily hold directors liable for the conduct of others over which they have no control.
The BVCA has also continued dialogue with BEIS as it develops sweeping new powers to screen transactions that could present national security risks. The BVCA, having successfully argued for a voluntary regime, is now working to alleviate any extra burden these rules might impose. We are also tracking the impact of similar rules in the United States and the proposals in the European Union.
The private equity and venture capital industry is well positioned to have voice in these developments given our commitment to building lasting and sustainable value in business, and our shared goal of making the United Kingdom a reputable place to invest.
Gurpreet Manku, Deputy Director General and Director of Policy at the BVCA
The BVCA has published a member briefing on narrative reporting developments for portfolio companies and this is available here.