A corporate governance code for unlisted companies?

The recent scandal involving Sir Philip Green and BHS Ltd has once again brought into focus the value of good corporate governance, but what is unusual about this case is that BHS is a private company. When corporate governance is discussed, it is usually discussed in relation to large listed companies–indeed, the UK Corporate Governance Code ‘applies to all companies with a Premium listing of equity shares’ and it is widely acknowledged that many of the recommendations contained in the Code would not be appropriate for smaller companies. But the BHS incident demonstrates that governance is also important for unquoted companies (who generate the bulk of a country’s GDP). When Sir Philip Green purchased British Home Stores plc in 2000 for £200 million, one of the first things he did was to convert it into a private company. Over the next few years, BHS Ltd paid out hundreds of millions in dividend payments (most of which went to Monaco-based companies controlled by Green’s wife) which were often in excess of the company’s profits. A parliamentary inquiry concluded that ‘the Green family became incredibly wealthy … but in doing so reduced the capacity of the company to invest and succeed.’ This resulted in BHS being unable to compete and it started sustaining losses. Desperate to offload the company, Green sold it to Retail Acquisitions Ltd (‘RAL’) in 2015 for £1. However, Dominic Chappell, the owner of RAL, was described as a ‘manifestly unsuitable purchaser’ who had a record of corporate failure. Unsurprisingly, he was unable to rescue BHS and in April 2016, it was placed into administration. It was revealed that BHS’s pension fund deficit stood at £571 million. 11,000 BHS jobs, the majority of which are low paid, are now at risk.

A parliamentary inquiry into BHS called into question the governance of the various companies involved. The inquiry noted that, whilst most of BHS’s competitors were subject to the Code, BHS was not as it was a private company. The inquiry concluded:

Sir Philip chose to run these companies as his own personal empire, with boards taking decisions with reference to a shared understanding of his wishes rather than the interests of each individual company. Boards had overlapping memberships and independent non-executive directors did not participate in key decisions. We saw meagre evidence of the type of constructive challenge that a good board should provide. These weak governance arrangements allowed the overarching interests of the Green family to prevail and facilitated the flow of money off shore to the ultimate beneficial owner of the parent company, Lady Green…. These weaknesses in corporate governance contributed substantially to the ultimate demise of BHS.

The co-chair of the Parliamentary inquiry, Frank Field MP, subsequently stated that ‘[s]afeguards for important private companies may need to be reviewed’, leading us to ask whether some sort of governance Code might be suitable for companies not generally subject to the UK Corporate Governance Code. Unlisted companies constitute the vast majority of companies. Of the 3.508 million companies on the register in the UK, only 6,240 are public (and the majority of those are not listed). The 3.5 million unlisted companies are incredibly diverse, ranging from single person private companies with low turnovers to massive companies that rival listed companies in scale. Any Code designed for such companies would need to take this breadth into account and be suitably broad.

One approach is to encourage unlisted companies to comply with existing Codes, but recognise that such Codes will have limited applicability. This is the view taken by the Institute of Chartered Secretaries and Administrators, who do not feel that a new Code is necessary and have stated that ‘[p]rivate companies should simply be expected to have more areas where they depart from the existing UK Corporate Governance Code.’ A similar approach is taken by the G20/OECD Principles of Corporate Governance. These Principles focus on listed companies, but they also state that ‘they might also be a useful tool to improve corporate governance in companies whose shares are not publicly traded. While some of the Principles may be more appropriate for larger than for smaller companies, policymakers may wish to raise awareness of good corporate governance for all companies, including smaller and unlisted companies.’

However, the above Codes were not designed with unlisted companies in mind and many are of the view that a specific Code needs to be established that caters for unlisted companies. In fact, such a Code already exists.

The Corporate Governance Guidance and Principles for Unlisted Companies in Europe were established by the European Confederation of Directors’ Associations in March 2010. In November 2010, this guidance was amended by the Institute of Directors to apply more specifically to UK companies and released as the Corporate Governance Guidance and Principles for Unlisted Companies in the UK (a copy can be obtained by contacting the Institute of Directors). The Guidance sets out nine Principles that apply to all unlisted companies, and a further five Principles that apply to large and more complex unlisted companies. The Guidance provides an extremely useful discussion of why governance is so important for unlisted companies, and goes into considerably more detail than the UK Corporate Governance Code. Unfortunately, it has never gained the foothold that the UK Corporate Governance Code has (likely because it has no formal backing from any regulators) and it is in need of an update. There are indications that the IoD is considering updating the Guidance and, if it does, it is to be hoped that use of the Guidance will become more widespread.


Featured image: Image used under Creative Commons Attribution Share-Alike International 4.0 licence. Image created by MStott4 and was obtained from Wikimedia Commons.

4 thoughts on “A corporate governance code for unlisted companies?

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