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  • Writer's pictureLucy Boreham

Why is Governance so often the afterthought?

I’ll admit it, I’m fascinated by Governance, these are words I never thought I would utter, but I’m hooked. It’s in the news, we see the highs and lows through our client work and we experience it every day through our own interactions with brands.


Yes, it is the third and a very important pillar of ESG, but it is so often the one that is overlooked, dismissed and for some smaller businesses deemed not relevant. Yet getting the principles of Governance are so vitally important to sustainable business growth and creating a strong resilient business.


Why is Governance so important?

Governance defines the system, rules, policies, and processes by which you manage your business, setting a standard for corporate behaviours and ensuring that your business decisions protect the value of your business, your reputation and take into account the needs of all your stakeholders.


A company’s board or leadership team is often made up of a team of people, all who will view “business performance” through different lenses both in terms of their responsibility within the business but also from their own personal experiences and value set. Governance ensures that a business has defined accountability for decision making for the business, ensuring consistency and transparency in that decision making.


What are the UK Governance requirements?

Like much of the UK’s laws and regulations relating to businesses, it varies depending on your size and whether you are a public or private business.


The UK Corporate Governance Code 2018 (the 2024 code will come into effect for financial years beginning or after 1st January 2025) applies to companies listed on the London Stock Exchange, who are expected to apply and report the Principles of the Code including:

·      Board leadership and company purpose

·      Division of responsibilities

·      Composition, succession and evaluation

·      Audit, risk and internal controls

·      Remuneration


Since January 2020  large private companies (2000+ employees, £200m+ turnover) have had to report on their corporate governance arrangements and stakeholder interests (under s172 of the Companies Act 2006), with a recommendation to apply the Wates Corporate Governance for Large Private Companies which includes six principles:

·       Purpose and leadership

·       Board composition

·       Director responsibilities

·       Opportunity and risk

·       Remuneration

·       Stakeholder relationships and engagement


What is the requirement for SMEs?

The Companies Act 2006 s172 requires companies with a turnover of £36m+ / balance sheet assets above £18m and have more than 250 employees to report on their compliance with S172 as part of their Strategic report.


But if your business doesn’t meet any of these requirements then you have no obligation to publish or disclose this information. In the UK the SME business population is estimated to be 5.5 million SME businesses, with 5.47 millions of these classes as “small businesses”. For some of these 5.47 million small businesses, Governance might feel like an overwhelming or irrelevant issue as you fight to survive as a business. But it is the foundation of sustainable business growth, considering Governance is key to your business success.


We’ve seen many examples of smaller businesses deeming Governance not to be relevant to their business as they are too small, and then witnessed the impact the lack of Governance has had on them through employee tribunals linked to a lack of policies and processes, closed decision making preventing them from accessing new markets as they didn’t deem the product as having a future in their sector, or companies failing to manage operating costs through a lack of proactive “horizon scanning” of issues such as energy costs, or failing to attract and retain talent into your business. A lack of governance, even at the start-up phase can lead to reputational risk, failing to attract and retain new customers and ultimately business collapse.


When Governance goes rogue

In recent weeks we have seen the mainstream press cover examples of businesses who have failed to implement effective corporate governance, from fast fashion, craft breweries, global information and communications technology and leading global aviation brands. These examples all demonstrate the vital role that Governance plays in effective decision making within a business and what can happen when not effectively practiced within a business.


The new chapter for Governance- does it go far enough?

The Corporate Governance Code was first launched over 5 years ago, since its launch we’ve seen large number of corporate failures. This has led to greater scrutiny on audit and corporate governance processes and a much anticipated “overhaul” to the Code.  


The revisions to the Corporate Governance Code (2024) were announced yesterday after a lengthy consultation in 2023, with mixed reviews. The main change appears to focus on Internal Controls and the requirement for the board to, at least annually, review and report on the effectiveness of the businesses risk management and internal controls framework- but not until 2026 and only for listed companies. Areas such as enhanced diversity reporting requirements and enhanced responsibility for audit committees on ESG issues appear to have been dropped. So do these changes really go far enough, and will they materially make a difference to the way in which businesses apply governance practices? Or is this a signal for change in what is often perceived as onerous and excessive corporate reporting requirements?


We would love to know your thoughts on governance issues. Follow us @BayNel for more on ESG related issues. Should you need help or support on ESG related issues, please contact us.

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