New governance rules for unlisted companies aren’t needed, and would do more harm than good.
With our departure from the European Union looming and the global economy slowing down, you might think the last thing our major private companies needed was a corporate governance code. But they are going to get one anyway. In the wake of the collapse of BHS, and one or two other scandals among private companies, the Financial Reporting Council (FRC) decided it was time to toughen up standards. This month, the FRC unveiled the Wates Code, a set of principles it expects the country’s largest unlisted businesses to comply with.
From the start of the new year, private companies with more than £2bn in assets or 2,000 staff will have to comply with a set of principles. They should have “an effective board that develops and promotes the purpose of a company and ensures its values, strategy and culture align with that purpose”, apparently, while the “directors should foster effective stakeholder relationships aligned to the company’s purpose.” It might sound like nothing more than well-meaning waffle. But companies will have to report on how they are implementing it. And it may only be the start. Experience tells us that once regulators start taking control of an area they impose more and more rules with every year that passes. And yet, there is very little evidence private companies need any kind of governance code at all.
First, there are no absentee owners in the way there are for quoted companies. One of the strongest original arguments for codes of corporate governance was that institutional shareholders didn’t really oversee the quoted businesses they nominally owned. Small private shareholders took even less interest. The result? The company ended up being used to serve the managers rather than its real owners – and so strong non-executives were needed to stop that from happening.
But obviously that doesn’t apply to private companies. Either the founder or their family are still in charge, and they care passionately about the business and its future. Or else there is a single dominant shareholder, usually a private equity fund. They might have their own faults, such as poor succession planning where the family is still in control, or too much emphasis on financial engineering among the private equity houses. But there is no question they keep a close eye on the businesses they own, and they know how to make sure their interests are aligned with the managers.
Conduct codes haven’t helped listed firms
Next, we have had plenty of governance codes imposed on the quoted sector in the last two decades. We started with the Cadbury Code in 1992, and moved onto the Greenbury Code in 1995, followed by the Hempel Code in 1998, and since the Financial Reporting Council took over there have been a constant stream of updates and revisions. And yet, have they actually done anything to improve the way companies are run? The returns to shareholders have been dismal for almost two decades, executive pay keeps going higher, and there is very little evidence companies are innovating more or treating their staff and suppliers better. All they have done is create a box-ticking risk-averse culture. The last thing we need to do is let that infect private businesses too.
Finally, some of our best companies are privately owned. Take a look a list of the top ones in the country measured by sales. It includes the likes of John Lewis, Swire Group, JCB, Specsavers, Dyson and Virgin Atlantic. They are all, surely, models of long-term management, investing in new products, and in the skills of their staff. It would be great if a few more quoted companies were as innovative as Dyson, cared as much about quality as JCB, or looked after their people as well as John Lewis.
It is very, very hard to see how any code of conduct is possibly going to improve any of them, or indeed any of the other companies in the top hundred. They are already performing better than most of the FTSE. So there is no problem to solve.