Audit watchdog urged to strengthen corporate governance for large private companies

The Chartered Institute of Internal Auditors (Chartered IIA) has submitted its response to the Financial Reporting Council’s (FRC) consultation on The Wates Corporate Governance Principles for Large Private Companies: calling for the principles to be further strengthened and for the audit regulator to play a central and proactive role in their application.

In its response, the Chartered IIA has urged the audit regulator to strengthen its proposed principles for large private companies – which is essentially a corporate governance code covering these specific businesses – by more closely mirroring measures contained within the UK Corporate Governance Code for public listed firms, coupled with a call for the regulator to take charge of monitoring the application of the principles.

Dr Ian Peters, Chief Executive of the Chartered Institute of Internal Auditors said:
“Large private companies are integral to supporting jobs and growth; this is why we must strengthen corporate governance for these businesses and help to ensure they continue to prosper”.

These companies constitute a massive proportion of the economy; they contribute to productivity, generate employment, and provide vital goods and services.

However, the collapse of BHS, itself a large private company, exposed a number of corporate governance deficiencies, including a lack of transparency and accountability – with its collapse having a catastrophic impact on stakeholders including suppliers, workforce, customers, and the wider economy.

“There are many other well-known companies that are not publicly listed, but are nonetheless strategically important for our future prosperity; therefore, ensuring their longevity and success is vital. We believe the additional corporate governance measures we have put forward for large private companies should help to achieve this.”

The key recommendations contained within the Chartered IIA’s response to the FRC include that the principles should be updated to state:
That there should be separation between the chair and chief executive.
That there should be transparent, rigorous and formal appointment procedures for directors.
The importance of having an appropriate balance of both executive and non-executive directors.
That non-executive directors should have sufficient time to meet their board responsibilities and that non-executive directors should provide constructive challenge, strategic guidance, offer specialist advice and hold management to account.
That the board’s approach to stakeholder engagement should be made available to material stakeholders on an annual basis.
All of these recommendations mirror those already contained within the UK Corporate Governance Code which covers publicly listed companies and we believe there is a strong case for including them in the code for large private companies so as to enhance and strengthen corporate governance in the UK.
Finally, the Chartered IIA has recommended that monitoring the application of the new code should be the responsibility of the FRC. The Chartered IIA sees the role of promoting good corporate governance in public interest entities as part of the core work of the FRC. We therefore believe it is fundamental that the audit regulator plays a pivotal and pro-active role in how the Wates Principles are applied.