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Could the collapse of BHS affect the corporate governance of large retail groups?

Posted: 06/11/2017

Following the criticism received by retail giants such as BHS and Sports Direct for poor corporate governance practice, the Government has started a consultation process and draft secondary legislation covering corporate governance principles for large private companies could be before Parliament as soon as March 2018.

Duties of companies

Currently, the Companies Act 2006 contains a series of duties for directors but the wording used is widely drafted and open to interpretation. Although they may work in small businesses, the BHS experience shows how large privately-held companies also have duties towards stakeholders, employees, customers and suppliers.

Broadly speaking, the BHS case brought to light the importance of:

  • implementing a good corporate governance practice for large groups;
  • avoiding intra-group conflict of interest;
  • avoiding transactions which are not at arm’s length; and
  • directors promoting the interest of the company and not of the ultimate beneficial owner.

The future

The 2017 Business, Energy and Industrial Strategy Committee report suggested that large privately held companies should be required to demonstrate that they meet certain minimum standards. This is not only to mitigate the risks of failure, but also to increase engagement with, and the confidence of, the communities from which they draw their workforce and in which they seek to sell goods and services.

The implementation of a new voluntary code for private limited companies has been suggested. The proposal includes a “light touch” approach based on providing specified information, but potentially covering revenues, compliance with the Companies Act 2006, company structure, executive pay, numbers of employees and pension scheme contributions.

The code should work on a “comply or explain basis” like the existing code for listed companies, meaning that every time a company wants to follow a different route it should be able to explain the basis for that choice.

The initial view of the Government is that these requirements should apply to companies with more than 2,000 employees. According to an initial estimate, this will affect about 1,400 companies.  

Action points

The solutions proposed include:

  • the appointment of non-executive directors to the board to assist with increasing scrutiny and accountability regarding decision making; and
  • the creation of committees in order to allow a more effective discharge of the board’s duties.  

Retail groups should start considering whether they are in a position to comply with the above proposed solutions ahead of the likely changes that 2018 will bring.

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