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Family corporate governance

Corporate Governance of private companies in Europe - are we aligned?

Posted on 16 September 2021

Private companies make an important contribution to productivity, employment and the provision of goods and services in the UK and across Europe. Although subject to differing legal regimes in each country of incorporation, they are generally afforded the advantage of relative flexibility and freedom in their management and constitution and far fewer reporting requirements when compared to listed companies. Nonetheless, some high profile failures of large private companies; escalating calls to demonstrate sustainable business practice; and the potential for Government intervention with stricter regulation, have led to pressure on private companies to improve corporate governance. The result has been a move towards publication of industry-led guidance to be used as a voluntary framework for implementing sound governance and as a reporting tool. 

Significantly, in April 2021, the European Confederation of Directors' Association (ecoDa) published updated Corporate Governance Guidance and Principles for Unlisted Companies in Europe together with a self-evaluation questionnaire to allow companies to measure their corporate governance performance. In the Foreword to the principles (which were originally published in 2010), the Chairman, Jan Wesseldijk, states that "This publication responded to a concern of the European Commission which was considering whether its own action (…) would make sense.  Eventually, the Commission preferred to rely on voluntary initiatives and, in particular on the initiatives taken by ecoDa". Interestingly, in the UK, the publication by a Government backed industry coalition in December 2018 of the six Wates Corporate Governance Principles for Large Private Companies has also proven to be a largely well received industry-led response to the prospect of Government intervention.  We were delighted to discuss the Wates principles with Sir James Wates CBE, chair of the coalition, earlier this year in our Mishcon Academy digital session - Governance in family business (and you can see and read edited highlights here).

Although the Wates principles are the primary standard for UK private companies, it is interesting to see that they both cover common themes such as:

  • the importance of a corporate purpose and leadership;
  • a diverse, balanced and structured board of directors;
  • remuneration;
  • identification and mitigation of risks; and
  • stakeholder engagement.

This is illustrated by our navigation table which places the two sets of principles alongside each other and - using colour highlighting - shows where they (or the guidance which accompanies them in the full publications) treat similar topics. From this you will notice that the 14 ecoDa principles (divided into two phases depending on the complexity and size of the company) are more granular when compared to the six concise and flexible Wates principles.  However, when the guidance accompanying the Wates principles is taken into account, they cover similar ground (albeit differently).

Notably, however, the ecoDa has published a specific principle and guidance for family companies:  See principle 9: "Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationships between family governance and corporate governance". The accompanying guidance explains some of the difficulties and tensions typically faced by family-owned businesses and the structures which, depending on the size of the business and family, can be adopted to help manage the relationship between the family and the business.  This includes putting in place a family constitution or protocol to outline the vision and objectives of the family for the business, family policies in relation to family member employment, share transfers and succession, and to define the roles of family governance bodies and their relationship with the board. The family governance bodies may include a family assembly (allowing all family members to stay informed about the business and with an opportunity to voice their opinions) and a family council (normally elected by the assembly to make decisions on behalf of the family in relation to the company).  The guidance emphasises that once such structures are created, it must be clear that family governance should be distinct from business governance. However, it observes that, despite the important role of family institutions in coordinating and unifying the interests of extended families, "the most important step for ensuring the long-term survival of a family company is the establishment of a strong board with independent non-executive board members". The topic of board composition and independence is covered in more detail in ecoDa and Wates principles 2 and ecoDa principle 11.  Family businesses might also consult the resources published by the UK's Institute for Family Business and the Family Business Network for further inspiration on governance in family businesses.

Wates and ecoDa are very much aligned in their non-mandatory nature, leaving companies space for flexibility.  Both are voluntary and both recognise that there is no 'one size-fits all' approach given the differing types of size and structure of private companies (and in the case of ecoDa) legal regimes.  Both also encourage reporting on how the principles have been applied in order to build trust.  EcoDa recommends that 'although there may not be a legal obligation to do so, the company should consider how to communicate their governance framework through some kind of corporate governance statement in their annual report or on a website.  This will help to build trust and legitimacy amongst stakeholders.  Within this statement, boards should aim to explain in their own words how they have implemented the ecoDa Principles in their governance practices'.  Of course, in the UK, some very large private companies are required by law to publish a corporate governance statement setting out which code, if any, the company has applied, how it did so and explain any departures from that code.  Indeed, the Wates Principles were published to be a UK resource for that reporting. However, the Wates principles are designed to be used by a wider range of companies and advise that an 'apply and explain' approach be used given their high level and flexible nature – this approach assumes that the individual companies will apply all of the high level principles and explain how.  This approach is in contrast to the "comply or explain" principle adopted in many European governance codes for listed companies – for example, in the UK, the Financial Conduct Authority's Listing Rules which require companies to explain whether they have complied with more the more prescriptive 'provisions' of the UK Corporate governance code or explain why they have not.    

The ecoDa principles also state that it is hoped that they will provide "a foundation for the development of more country-specific corporate governance principles at the level of individual countries".  The 'additional resources' section lists the Wates Principles and similar codes and guidelines which already exist for private companies in Slovenia, Finland, Swizerland, Belgium and Spain. We note that, according to its website, ecoDa includes the UK's Institute of Directors (IoD), Institute of Business Ethics and Chartered Governance Institute of UK & Ireland as full and affiliated members and that the IoD were closely involved in this update of the principles. It is encouraging to see that, notwithstanding Brexit, industry collaboration with the UK on this important topic is continuing.

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