MOON News

Our friends at TLT Solicitors have provided a useful overview of the Institute of Directors paper entitled "Corporate Governance Guidance and Principles for Unlisted Companies" (The Guidance). It is intended as an easy to follow set of principles that can be applied by directors of private companies to improve corporate governance.

 

The Guidance largely tracks the UK Corporate Governance Code which most listed companies appearing in the FTSE indices are required to apply. However it has been tailored to the specific needs of smaller companies and unlike the Code, there is no legal obligation for companies to conform to it.

 

The purpose of the Guidance is to provide practical steps and principles that private companies can apply to improve how they are run and managed. These cover a range of areas but generally they are designed to:

• Ensure value is protected for shareholders, as there is often no ready market for shares in private companies;
• Balance the interests of founder families with the success of the company; and
• Promote long term success and attract external investment.

 Recommendations include:

• That all private companies should have an appropriate constitution in place to regulate how the directors and shareholders interact with each other.
• The importance of having an effective board, of a size and composition relative to the size and complexity of the company.
• The board should have some form of succession planning in place
• The employment of non-executive directors to provide an independent oversight of the board.

 

The Guidance stresses the importance of an independent board and a separation of power between those running the company and those with a financial interest. In smaller companies these will often be the same people however the Guidance emphasizes that no one person should have unfettered control or powers of decision making.

 

A note on family businesses:

Research has shown that family controlled companies rarely survive past three generations. The reason for this, according to the Guidance is the failure to distinguish between the interests of the company and those of the family. It is also natural that over time as shares pass down generations the number of family shareholders can quickly increase which can lead to administrative difficulties and disagreements.

To address this problem the Guidance suggests forming a family council and a family assembly. The family council is a small body of family members, voted for by family members to represent them, liaise with the board and to make decisions on behalf of the family. The family assembly consists of all family members and should meet twice a year to discuss their concerns with a view to pre-empting and preventing conflicts.

The Guidance suggests formalising this by putting in place a family constitution, which may take the form of a shareholders' agreement or nominee agreement. This should set out:

• The family's values, mission statement and vision;
• The role of a family council; and assembly;
• The role of the board of directors and its relationship with the family council;
• Policies for important family issues, such as employing family members, restricting transfer of shares and succession planning for the chief executive;
• and Nomination of family members to the board.

The intention of this is to balance the interests of the family together with promoting a strong independent board and promoting the long terms success of the company.

If you would like further information, the full text of the Guidance is available at this web address: http://www.iod.com/MainWebsite/Resources/Document/corp_gov_guidance_and_principles_for_unlisted_companies_in_the_uk_final_1011.pdf

To discuss any aspect of this article please contact a member of the TLT team:

Andrew Webber       Partner                  andrew.webber@tltsolicitors.com

Mark Stockdale         Solicitor                mark.stockdale@tltsolicitors.com