Important New Reporting Requirements for UK Private Companies

Many UK private companies (and unlisted public companies) must include additional information in their 2020 annual reports because of new company law¹ that applies to them for financial years beginning on or after 1 January 2019.

The principles

A corporate governance statement provides a company with the opportunity to demonstrate effective leadership and sound engagement with its stakeholders. The Principles recognise the range of different management and ownership structures deployed by private companies and consequently facilitate a flexible approach to corporate governance by featuring six high-level voluntary principles:

1. Purpose and leadership - An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
2. Board Composition - Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company. 
3. Director Responsibilities - A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision making and independent challenge.
4. Opportunity and risk - A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks. 
5. Remuneration - A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company. 
6. Stakeholder relationships and engagement - Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.

A company cannot simply state that it complies with the Principles but must apply them by providing a supporting statement for each principle that demonstrates how its corporate governance processes operate and achieve improved governance outcomes. 

The Principles are supported by non-exhaustive guidance to help companies apply them in practice, the intention being to move beyond a 'tick box' approach. It is hoped that explanations of the applications of the Principles combined with and cross-referenced to other statements will increase transparency and contribute to building trust with the company's stakeholders.

Preparing to meet the additional reporting obligations

• Determine which statements will need to be included in the company's 2020 annual report and brief the board of directors so that they are aware of the new reporting obligations. Failing to include the required information in the strategic or directors' reports or failing to post and maintain them on a website can result in a criminal offence being committed by every director of the company who is in default together with the imposition of a fine.
• Establish operational procedures and policies that will help the company to record and incorporate the relevant information into the statements to be published in the 2020 annual report. The information in the statements must be clear, relevant and meaningful for shareholders and other stakeholders Although the amount of information reported will depend on the nature, size and complexity of the particular company, unnecessary repetition can be avoided in the strategic and directors' reports by cross-referring between the statements.
• Consider the implications for any group companies. Every group company meeting the qualifying test for each statement must include a separate identifiable statement in the strategic report or directors' report and on a website.
• Review practical arrangements for publishing the statements in the 2020 annual report and on the company's website (or a website connected with the company), the information on the website needing to remain until the statements for the following year are posted. The obligation to post the statements on a website can be satisfied by posting the strategic report, directors' report or the annual report to the website. The statements for a subsidiary company can be posted on its parent company's website provided it clearly identifies the subsidiary.
• If the company has not previously reported against a governance code, assess whether the Principles are the most appropriate code and if so, consider the policies and procedures that should be implemented to be able to report against them in the 2020 annual report. If the company already reports against a governance code voluntarily, review the continuing suitability of doing so. A subsidiary of a listed parent applying the UK Corporate Governance Code throughout its group might, for example, wish to explain in its 2020 governance statement that it did not apply a code because of that reason.

If you would like to discuss how the new reporting requirements apply to your company and the steps that the company needs to take to ensure that it complies with them, please speak with your usual contact at Ashurst LLP.

1. The Companies (Miscellaneous Reporting) Regulations 2018 and Q&A
2. The reference to company in this column means a private company or an unlisted public company.
3. Company law already requires directors to consider these interests and issues in their decision-making but it is now necessary to report on how they have done so.
4. This enhances the information about employee engagement matters that companies already have to include in their directors’ report.