To Code or Not to Code? A Question for Large Companies
As we approach the end of 2019, we look back on the requirement introduced by the Companies (Miscellaneous Reporting) Regulations 2018 (Regulations) for very large private companies to make a statement about their corporate governance arrangements.
This statement relates to financial years beginning on or after 1 January 2019 and as we head into 2020, the new year will bring with it the start of the first actual reporting period under the Regulations.
While the Regulations introduced several new reporting requirements, this article will only focus on the statement of corporate governance arrangements.
What does the new requirement mean?
It means that every company in scope will have to include a statement about its corporate governance arrangements in the directors’ report (and publish the statement on its website) stating which corporate governance code, if any, the company applied and how. It also means that if a company has not applied any code for the financial year, the statement must explain the reasons for that decision and what other arrangements for corporate governance were applied.
It is expected that many companies will choose the new Wates Principles as their governing code, since those principles have been designed with large private companies in mind, but there are other codes that can be chosen.
What is a “large” private company?
A company will need to comply with the new requirement if it is incorporated in the UK and has:
- more than 2,000 global employees; and/or
- a turnover over £200 million globally and a balance sheet total of more than £2 billion globally.
It applies to companies which do not already have to provide a corporate governance statement under the disclosure guidance and transparency rules. There are also certain other exemptions.
The requirement applies to all qualifying companies, including subsidiaries.
Why has it been introduced?
The new reporting requirement forms part of a wider range of measures introduced by the government to strengthen the UK’s corporate governance framework against a backdrop of high profile private company failures over recent years. It is intended that the new requirement will help to build confidence in the way the UK’s largest private companies are run and should encourage high standards of corporate governance in those companies.
What if a company fails to comply?
The new requirement adds to matters in existing legislation that companies already need to report on in the directors’ report. Therefore, non-compliance would result in an offence being committed by the directors.
Non-compliance could also have an adverse impact on a company’s reputation and risk the directors being in breach of their duties under the Companies Act 2006.
Most companies in scope will have already considered what corporate governance arrangements apply to it, but if you think that your company meets the threshold, and you require further guidance on which code to choose and how to navigate the new requirement, please contact Siân Sadler or Paul Batchelor for more information.
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