Ministers are preparing to back the idea of extending the governance code for stock market-listed companies to large privately-owned businesses, in response to public anger at a string of scandals including the collapse of BHS.
The proposal to extend the City’s governance code to the private sphere was first put forward by the Financial Reporting Council, an independent body that regulates City behaviour, including adherence to corporate behaviour codes for public companies.
The code for public companies was introduced in the 1990s in the wake of the Polly Peck scandal, when the business empire of disgraced tycoon Asil Nadir folded with debts of £1.3bn. The code recommends that public companies are overseen by a board of directors, the majority of whom are independent from the company and its executives. Other aspects of the code are designed to ensure proper scrutiny of a company’s executives and their pay, as well as to bolster accountability to shareholders.
Ministers are expected to suggest the FRC also be invited to oversee governance rules for private firms, which could include well known companies such as JCB and Dyson as well as firms with large workforces that have been acquired by private equity funds, often using large amounts of borrowings. Theresa May is under pressure to prevent further scandals such as the failure of BHS, the retailer whose collapse has sparked criticism from MPs of its former owner, Sir Phillip Green.
The green paper, from the department for business, energy and industrial strategy, is also expected to confirm the prime minister has lost her appetite for putting worker representatives on company boards — a pledge she made in the summer as part of her pitch to succeed David Cameron as Conservative leader.
“The government have already ditched their flagship policy to put workers on boards. They try to sound radical, but this is a government whose warm words are closely followed by broken promises.”
Iain Wright, Labour MP for Hartlepool and chair of the business select committee, welcomed the idea of increased corporate governance for large private firms. “The BHS and Sports Direct committee inquiries highlighted weaknesses in corporate governance in both public and private companies,” he said. “Getting corporate governance right isn’t a hindrance; it should be the starting point for supporting long-term success.”
He added that the committee looked forward to also questioning business secretary Greg Clark on other areas — including executive bonuses and boardroom diversity — when he appears before the MPs next month.
Next week’s green paper will see ministers first formal efforts to address the topic of executive pay at stock market-listed companies. According to a report on Sky News, it is expected to stop short of more radical measures such as imposing a firm cap on pay — as proposed recently by City investment group Hermes Investment Management.
Instead, the green paper will reportedly suggest shareholders be given annual binding votes on the pay of company executives. Former business secretary Sir Vince Cable had introduced rules in 2013 requiring such a vote every three years.
Earlier this year MPs on the business select committee began examining the idea of extending governance codes from public companies to large private firms. In a submission to the committee, the FRC suggested law makers consider “a tailored code or guidance or regulated disclosure”, but stress that this should “take into account the specific circumstances of large private companies, which are not uniform in their ownership arrangements.”