UK: Corporate Governance Guidance and Principles for Unlisted Companies

The Institute of Directors has published Corporate Governance Guidance and Principles for Unlisted Companies. This publication is a practical tool for the shareholders, directors and stakeholders of unlisted companies. The original pan-European edition of the guidance - Corporate Governance Guidance and Principles for Unlisted Companies in Europe - was published by the European Confederation of Directors’ Associations (ecoDa) in March 2010.

This IoD and ecoDa initiative offers a corporate governance agenda for unlisted companies in the UK.

• Unlisted companies make a major contribution to UK economic growth and employment. However, the corporate governance needs of unlisted companies have, to date, been relatively neglected by governance experts as well as by policy-makers. In particular, the UK Corporate Governance Code is primarily aimed at listed rather than unlisted enterprises.

• Many unlisted enterprises are owned and controlled by single individuals or families. Good corporate governance in this context is not primarily concerned with the relationship between boards and external shareholders (as in listed companies). Nor is it mainly about compliance with formal rules and regulations. Rather, it is about establishing a framework of company processes and attitudes that add value to the business, help build its reputation and ensure its long-term continuity and success.

• Good corporate governance is particularly important to the shareholders of unlisted companies. In most cases, such shareholders have limited ability to sell their ownership stakes, and are therefore committed to staying with the company for the medium to long term. This increases their dependence on good governance.

• Good governance can also play a crucial role in gaining the respect of key external stakeholders. In an environment of mounting societal scrutiny towards the business world, even unlisted companies have to devote attention to their stakeholder responsibilities. Corporate reputation will benefit from a gradually increasing transparency and accountability.

• An effective governance framework defines roles, responsibilities and an agreed distribution of power amongst shareholders, the board, management and other stakeholders. Especially in smaller companies, it is important to recognise that the company is not an extension of the personal property of the owner.

• This briefing provides guidance for unlisted companies on the issues involved in designing an appropriate corporate governance framework. It also presents a set of governance principles that can be followed or not. This remains a voluntary decision of each unlisted company.

• Fourteen principles of good governance are presented on the basis of a dynamic phased approach, which takes into account the degree of openness, size, complexity and level of maturity of individual enterprises. A dynamic approach towards governance is essential, since governance frameworks must evolve over the life cycle of a business.

• A key step in the development of unlisted company governance is the decision to invite external directors onto the board. Its effect on boardroom behaviour and culture should not be underestimated.

• The principles provide a governance roadmap for family owners or founder-entrepreneurs as they plan the development of their companies over the corporate life cycle. These principles may be relevant for subsidiary companies and joint ventures as well. Even state-owned companies or social enterprise organisations can be inspired by the best practices laid down here.

Complete report.