Company Law and Corporate Governance

It is recommended that a wider range of companies not subject to the UK Corporate Governance Code should use the Wates Corporate Governance Principles (Wates Principles) to demonstrate good corporate governance. The Wates Principles provide a framework made up of six principles to help companies to meet legal requirements. When considering how to address COVID-19 risks within your business it may be helpful to you as directors to bear the following principles in mind along with considering your directors duties and your regulatory obligations such as under health and safety law:

An effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.

Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.

The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.

A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks.

A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company

Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.

There have also been recent announcements from our regulatory bodies to ease the burden of regulation and reporting on already strapped companies. The FRC has published guidance for companies preparing financial statements in the current environment of uncertainty created by the COVID-19 pandemic. The guidance highlights some key areas of focus for boards in maintaining strong corporate governance and provides high-level guidance on some of the most pervasive issues when preparing their annual report and other corporate reporting.

The London Stock Exchange published an Inside AIM newsletter setting out temporary changes relating to an AIM company’s obligation to publish annual audited accounts in accordance with the AIM Rules. These follow on from the Companies House announcement that UK companies affected by COVID-19 can apply for a three-month extension for filing their annual accounts.

The Financial Reporting Council (FRC), Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published a joint statement announcing a series of actions to ensure information continues to flow to investors and support the continued functioning of the UK’s capital markets against the backdrop of the challenges and economic uncertainty created by the COVID-19 pandemic.

The measures include:

  • The FRC issuing guidance for companies preparing financial statements in the current environment of uncertainty. This includes boards considering how to secure reliable and relevant information, on a continuing basis, to manage their future operations and those of their workforce and suppliers; and to pay attention to capital maintenance, ensuring that sufficient reserves are available when a dividend is made, not just proposed. Relevant considerations when assessing whether a dividend is appropriate should include current and likely operational and capital needs, contingency planning and the directors’ legal duties, both in statute and common law;
  • The FRC providing guidance on carrying out audit engagements that are affected by COVID-19; and
  • Utilising the available three-month extension to the date for filing annual accounts with Companies House.

The statement strongly encourages investors, lenders and other users of financial statements to take into account the unique set of circumstances arising from COVID-19 which might cause uncertainty in companies’ financial positions, potential delays in providing financial information, the need for auditors to undertake additional work to support their audit opinions and the increased use of modified audit opinions. It also urges lenders to have regard to the circumstances in responding to potential breaches of covenant arising directly from the COVID-19 pandemic. See How does Coronavirus impact borrowing arrangements?

For more information please contact businesslaw@woodfines.co.uk

-Claire Le Mouëllic