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Should there be greater alignment between the rules governing public and private companies?

30 October 2016 by Henry Ker

Should there be greater alignment between rules for public and private companies? - read more

The latest survey of the Governance and Compliance/Core community

Following the BEIS Committee’s (formerly the BIS Committee) inquiries into BHS and Sports Direct, and the pledge by Theresa May to overhaul corporate governance, the Committee has launched a separate inquiry into corporate governance. The inquiry is tackling a wide range of issues and ICSA has responded to the consultation (see more in this month's article, 'No simple solutions').

We posed one of the questions from the inquiry to the Governance and Compliance/Core community. We asked if there should be greater alignment between the rules governing public and private companies. The results were fairly evenly split, although the respondents answering ‘no’ were a slim majority (39%). 32% answered ‘yes’, with the rest (28%) responding ‘maybe’.

Of those who can see a case for greater alignment, the size of some private companies seems to be the main argument. As one respondent wrote, ‘This all depends on size … My feeling is that we are too quick to pigeon-hole a company based on whether it is public or private, without giving any consideration to more representative statistics such as number of employees, size of balance sheet etc. I do feel that there should be thresholds at which private companies should be held to higher standards than they are currently’.

The need to protect small companies was frequently cited as a consideration: ‘To a degree yes, but in order that unnecessary red tape is not applied to the smallest of private companies, perhaps there needs to be certain parameters related to size (turnover, profit, number of employees etc.) or in certain cases the sector in which they operate’, and ‘Alignment is helpful, especially given the size and economic impact of some private companies, but it has to be proportionate. Some private companies are very small and alignment would be burdensome’.

Size was a key consideration for those who are against the idea too, with one answering: ‘The rules for public companies are there for a reason; they could be too onerous to apply in private companies who may not have the resources to comply with them,’ and another, ‘There are good reasons why the rules for public and private companies are different. For public companies, there is a need to protect investors and facilitate efficient markets. These needs do not apply to private companies. There is, however, a need to encourage entrepreneurship and a balance has to be struck between regulation and encouraging business.’

We then asked which, if any, rules governing public companies should be introduced for private companies. Understandably, a large proportion answered ‘none’. However, of those who feel some rules could be brought into private company regulation, introducing the UK Corporate Governance Code, or some variance on the concept, is the most popular answer: ‘The Corporate Governance Code should apply to large companies to show that they are fit for purpose’. Alongside this, several answers also mentioned a requirement for private companies to have a company secretary, ‘Certainly, some of the larger private companies should be held to more stringent corporate governance standards, which would be helped by, for example, enforcing the need for a company secretary.’

Leading on from this, a few mentioned more independent oversight, ‘In particular, they should be required to have an independent non-executive director.’ Of those who feel no rules should be introduced for private companies, the already sizeable regulatory burden, and the Government’s Red Tape Challenge were cited as reasons. As one respondent commented, ‘Whatever happened to the Red Tape Challenge? … No more please!’

If you are a company secretary or governance professional at a leading UK business, and you would like to take part in or comment on future surveys, email team@core-partnership.co.uk

Conducted in association with The Core Partnership

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