January 2024 has shone a spotlight on corporate governance; two separate and unrelated events took place.
On 1 January, ITV aired the first episode of an outstanding 4-part TV drama, “Mr Bates vs The Post Office” Mr Bates vs The Post Office – Series 1 – Episode 1 – ITVX and then on 22 January the Financial Reporting Council (FRC) issued the Corporate Governance Code 2024 UK_Corporate_Governance_Code_
The prosecution by the Post Office of more than 4,000 sub-postmasters and sub-postmistresses, leading to approximately 700 criminal convictions, has been described by many commentators as one of the worst miscarriages of justice in the history of the UK. Whilst this is clearly indisputable, what the fallout from the defective Horizon software also demonstrates is a monumental failure of governance 1) within the Post Office, 2) within Fujitsu (who designed and built the Horizon software) 3) within the Business department which has had oversight of the Post Office and 4) finally at the apex, several successive government ministers from all 3 main parties over the lifetime of the Horizon project.
See David McIntosh’s earlier LinkedIn article on this subject which was written and posted before current Post Office senior management and the government, including the Secretary of State and the Prime Minister, quite properly but many, many years too late, capitulated:
David McIntosh on LinkedIn: The Post Office scandal exposes a second injustice
I'm not in the habit of reading material from centre-right think tanks but this is an excellent article in the The Independent by Sebastian Payne regarding the Post Office Ltd scandal where more than 4,000 sub-postmasters were prosecuted for fraud, leading to 700 convictions, thanks to its faulty hashtag#Horizon computer system designed and built by Fujitsu. Lives were destoyed and careers ruined...
Corporate Governance Code 2024
The Corporate Governance Code 2024 (the 2024 Code) applies to all companies with a premium listing, whether incorporated in the UK or not, and will apply to accounting periods beginning on or after 1 January 2025, with the exception of one provision covering boards’ monitoring of companies’ risk management and internal control frameworks which comes into force a year later on 1 January 2026. The 2024 Code provides that:
“Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders”.
The 2024 Code specifically highlights internal controls to effectively enhance transparency and investor confidence and the FRC adopts a “comply or explain” reporting approach against the principles and provisions it contains. Separately, the Financial Conduct Authority (FCA) which regulates financial services firms, sets out Listing Rules which require companies to make a statement of how they have applied the FRC Code’s Principles in a manner that would enable shareholders and stakeholders to evaluate how the Principles have been applied.
It is not intended, in this note, to cover the content of the Principles and more detailed Provisions of the 2024 Code but the key changes from the current (2018) Code are set out in the following link:
UK_Corporate_Governance_Code_2024_Key_Changes.pdf. []
On the 29 January, the FRC issued a very well-drafted guidance document Corporate Governance Code Guidance (frc.org.uk) to support the 2024 Code and to provide advice, further detail and examples to directors and others on its implementation. Each section contains helpful questions that directors and/or committee chairs should endeavour to answer in order to be able to satisfy the provisions of the 2024 Code.
Given that the 2018 Code currently regulates, and that the 2024 Code will regulate, from next year large listed companies and financial service companies only, what happens if the company you work for or advise does not have a premium listing or is not a financial services company?
The answer is that governance principles to be adopted for companies without a premium listing , namely large private companies over certain financial thresholds are governed by the Companies (Miscellaneous Reporting) Regulations 2018 (the Reporting Regulations) and the Wates Corporate Governance Principles For Large Private Companies, December 2018.
The Reporting Regulations The Companies (Miscellaneous Reporting) Regulations 2018 (legislation.gov.uk) apply to large private companies which fulfil 2 out of 3 of the following qualifying conditions: 1) turnover of more than £36m 2) a balance sheet of more than £18m and 3) has more than 250 employees.
Directors of companies which are impacted by the Reporting Regulations are obliged in the Directors’ report for the relevant financial year to provide a statement summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others and the effect of that regard including on the principal decisions taken by the company.
Additionally, large private companies (either or both of the following: more than 2,000 employees or a turnover of more than £200m and a balance sheet of more than £2bn) are also obliged to provide a corporate governance statement stating: 1) which corporate governance code has been applied, 2) how that code has been applied, 3) if the company has departed from the relevant code, the reasons for the departure and 4) if the company has not applied any corporate governance code, the company must explain the reasons for that decision.
It’s also extremely important to note that a failure by a company to make its corporate governance arrangements available on its website is an offence committed by every officer of the company who is in default. A person guilty of an offence under this provision is liable on summary conviction to a fine not exceeding level 3 on the standard scale. For ease of reference, the maximum fine at level 3 is £1,000. Information on the standard scale can be found through the following link: Sentencing Act 2020 (legislation.gov.uk).
Wates Corporate Governance Principles
It is not intended, in this note, to cover the detail of these principles but these can be found through the following links:
The Wates Corporate Governance Principles reflect the Reporting Regulations of June 2018. James Wates CBE, Chair said the following:
“The Wates Corporate Governance Principles for Large Private Companies provide a tool to help large private companies look themselves in the mirror, to see where they have done well and where they can raise their corporate governance standards to a higher level. This can in turn result in better engagement with their stakeholder base and ultimately build trust. Many companies are justifiably proud of what they are doing already. They have extensive processes in place to engage with the broad range of stakeholders that are integral to the company’s success, and in particular to ensure that workforce concerns are addressed at board level. The Wates Principles offer a structure for reporting on corporate governance that not only helps them fulfil their legal requirements, but also allows them to shine”.
Finally, to complete the picture, we should of course mention that the UK has a very large number of SMEs and micro companies. There are no formal regulatory governance obligations imposed on these companies, over and above those required by the Companies Act 2006, and directors’ duties under sections 170 to 182 in particular. However, companies are also obliged to comply with their own constitutions and companies therefore in their Articles of Association may have adopted their own governance arrangements
David McIntosh
David McIntosh was admitted as a Solicitor in 1988 and is a highly experienced commercial projects lawyer who has advised clients in a number of different fields including intellectual property, data privacy, procurement law (both public and private), manufacturing, distribution, information governance and general regulatory matters covering both the nuclear and pharmaceutical sectors.
For advice on the Corporate Governance Code 2024, reach out to David McIntosh on dmc@prospectlaw.co.uk or +44 (0) 7483 300 132.
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
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