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Corporate governance: New guidance for owner-managed, joint venture and other unlisted companies

03 June 2010

In April 2010, the Institute of Directors (IoD) published the first edition of Corporate Governance Guidance and Principles for Unlisted Companies in Europe, an initiative of the European Confederation of Directors’ Associations (ecoDa).

This new guidance provides an important reference point for unlisted companies wanting to develop their corporate governance systems and processes. The guidance brings together best practice taken from across the EU, applicable to unlisted companies such as family-owned and owner-managed companies, subsidiaries, joint venture and state-owned companies, start-ups and public sector social profit organisations.

The guidance is divided into two main parts. Part I provides general advice relating to corporate governance. Part II sets out 14 principles of good governance, the first nine of which (the phase 1 principles) relate to all unlisted companies. The remaining five principles (the phase 2 principles) apply to larger and more complex unlisted companies. With each principle comes a list of key points and practical considerations for unlisted companies to assist in implementing the principles.

Any unlisted company is free to adopt the principles it judges to be applicable and appropriate on an entirely voluntary basis.

It is recommended that once started, improving corporate governance within a company should be an ongoing dynamic process (hence the principles being split into two phases), developing and refining a company’s systems and processes as it grows and changes.

One of the biggest challenges for unlisted companies is simply to begin the process of improving corporate governance, as owners are often sceptical and so need to be convinced at the outset of the advantages improving corporate governance can deliver. Good governance will depend, in any given situation, on clear and effective communication and engagement between the key players, namely the directors, management, stakeholders (such as customers, suppliers and employees) and shareholders, so it is important that shareholders fully support the process.

Improving corporate governance is not only for long established companies. In early stage, entrepreneur-founded and smaller companies, a single owner may well deal with most matters directly, initially through necessity, and later because ‘it is easier’ and ‘saves all that red tape’.

However, in the end this type of arrangement may not be sustainable and exposes a business to the risk of bad decision-making through a lack of objectivity and human weakness. Developing corporate governance in line with the principles identified in the new guidance will help to address these early-stage issues.

On an equally ambitious note, the guidance also declares that it should serve as a basis for EU member states to develop or update national corporate governance codes for unlisted companies.

The guidance can be found on the ecoDa website at www.ecoda.org

Will it be taken up widely?

Yes, probably for a number of good reasons, but not immediately.

First, it is voluntary and designed to be flexible, allowing for unlimited companies of different size and complexity. This means companies can make changes in line with the principles at their own pace. Usefully, it is suggested that the principles in Part II should be treated as proposals at the outset.

Second, most unlisted companies cannot grow beyond a certain size without effective delegation beyond a small founding or controlling group. An effective, adaptable governance structure is required to provide suitable parameters for decision-taking and change in the structure of the company. For example, Shareholders’ Agreements or Joint Venture Agreements can address these and other issues relating to corporate governance (including the statutory duties of directors under the Companies Act 2006).

Third, there are real commercial benefits to be had in circumstances where the cost of attaining those benefits can be planned and controlled. For example, these might include:

Fourth, a competitive advantage may be secured – for example where, through better developed corporate governance, new opportunities become available. For instance, consider what is behind the phrase ‘punching above their weight’ – generally this means that a company knows how some of its larger competitors act and aligns its business as far as possible along similar lines to compete for new business opportunities that it might not otherwise have access to.

Next steps: What should unlisted companies do next?

Unlisted companies should consider adopting this three step process:

  1. Learn how better corporate governance can improve performance in unlisted companies
  2. Identify the changes needed and develop a process of change implementation as a dynamic rolling programme with distinct phases and milestone objectives
  3. Identify where behaviours need to change to get the best out of the new arrangements supporting the shareholders, directors, management and other stakeholders as necessary to achieve it

Details of how an unlisted company should execute this three step process will of course depend on the particular circumstances affecting the company.

Long journey ahead

Because of the nature of unlisted companies – and outside of any additional regulatory environment that might apply – it will be difficult to identify whether improvements in corporate governance in unlimited companies has or will become a developing trend. Nevertheless, there are things we do know.

The banking crisis has moved corporate governance up the agenda. The IoD and its fellow members of ecoDa consider it important. In many cases, commercial advantage might be achieved over competitors resulting from demonstrable good corporate governance (consider the measures and efficiencies private equity houses typically introduce through improved corporate governance on acquiring a new portfolio company, to improve competitiveness).

Further, when new employees, customers and suppliers are considering working with a company, a level of reassurance can be achieved through demonstrable good governance. This could be in the form of interaction with the wider community. For example, consider how social responsibility programmes can evidence good governance, specifically the values and standards of behaviour a company sets for itself.

It might involve employees in effecting changes to corporate governance, thus establishing a good reputation both within the company itself and externally.

Good governance is a key component to the continuing success and stability of listed companies in the UK (for example, for successful fund-raising in capital markets) and therefore it is likely to be beneficial in the unlisted company sector too but perhaps in different ways.

Accordingly, if you are an unlisted company and have not really considered the issues raised in this article before then make a note to put a review of corporate governance on your ‘to do’ list, ideally towards the top. Better still; seek out some initial advice on developing an action plan and make a start.

As the Chinese proverb goes: “A journey of a thousand miles begins with a single step.”

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Dean Drew

Partner
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E: dean.drew@shoosmiths.co.uk