The need for governance in private companies

"Some people see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.” – Winston Churchill

An article in the Financial Times at the weekend struck a chord with me. The author was making the argument against a proposal from the Institute of Directors to update its six-year-old corporate governance code for private companies, saying that ‘The IOD and government should follow the example of owner managers: mind their own business’.

Here at ICSA: The Governance Institute, we do not always agree with our friends at the Institute of Directors, but in this case we are on their side and an edited version of this blog has been submitted as a letter to the editor of the FT.

The writer appears to have confused governance with red tape, quoting Richard Branson’s comment that he always carries scissors to cut the red tape that gets in his way. This is a common mistake, but a mistake nonetheless. Governance is, quite simply, the mechanism for owners to oversee the management of organisations, and by which management oversee their day-to-day activities.

I am sure that Mr Branson has plenty of mechanisms in place to oversee those he has charged with managing his businesses. This is governance, although we do not always think of it as such. At ICSA, we see the requirement for similar mechanisms in organisations in all sectors, including the NHS, academy trusts and charities.

Transparent governance is important. As the article says, there are legal and regulatory requirements on companies of all sizes. Companies are required to submit annual reports and financial statements to Companies House, where they will remain in the public domain for, currently and rightly, twenty years.

Directors of all companies, however small, have a statutory duty to promote the success of a company for the benefit of its members as a whole. They must also have regard to the long-term consequences of their decisions, and the impact on the interests of employees, suppliers, customers, communities and minority shareholders.

Many larger private companies have established governance structures to ensure that this happens. BHS had done so – the question which will no doubt come before the courts in due course is whether the directors gave appropriate weight to those impacts.

Where ICSA would part company just a little with the IoD is that we do not believe that a new code is necessary. Private companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.

The article argues that ‘private companies are very often the property of founders or their families. As long as they treat staff, customers and suppliers decently and within the law, governance is up to them.’ This is true. But our experience is that many directors are not as familiar with these duties and their many other legal obligations as they should be, and that this is particularly the case in private companies.

That is one of the reasons why we advocate that all organisations large enough to require audited accounts, whether listed companies or not, should be required to indicate in their annual report where they have not complied with the UK Corporate Governance Code and the reasons why they have chosen not to do so. They should also have an appropriately qualified governance professional to advise directors on their duties and help them navigate their way through their legal obligations. This will not prevent such issues arising. It did not, for example, in the case of BHS. But it will help to ensure that proper thought is given to these matters.

Simply leaving private companies which have significant impacts on our society to ‘get on with it’ is no longer a tenable option.

Peter Swabey is Policy and Research Director at ICSA: The Governance Institute

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