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The architect of the UK’s governance standards for private businesses has criticised the government’s plans to extend some of the most stringent regulations for larger listed companies to their unlisted counterparts, claiming the changes would have a “significant negative impact”.
Sir James Wates, chair of the Wates Group, one of the UK’s largest family-owned construction companies, said proposals to expand the definition of “public interest entities” (PIEs) to include large private companies would increase costs and discourage growth and innovation.
The proposed reforms follow a public backlash over corporate collapses at outsourcer Carillion, café chain Patisserie Valerie and privately owned retailer BHS.
Wates, who also chairs the Institute for Family Business, said the proposals amounted to a “sledgehammer” and questioned the need for expanding the PIE regime, which currently applies only to large listed companies and finance groups.
“A small number of high-profile cases of poor governance — the examples of Patisserie Valerie and BHS are frequently cited, though it’s a big stretch to imply they reflect a trend — encourage ministers to be seen to be ‘doing something’ to ‘clean up big business’,” he told the Financial Times.
The proposed changes would mean privately owned companies or those with an Aim listing, such as Patisserie Valerie until it collapsed following a suspected fraud in 2019, would fall under the PIE definition for the first time if their turnover or employee numbers exceed certain thresholds.
Options for a wider definition, which could more than double the number of PIE companies to about 4,000, were included in a government white paper published in March. A public consultation on the plans, which would also make directors liable for the accuracy of company accounts, closed earlier this month.
The changes would be a burden on private companies, Wates said. “The extra audit and reporting requirements would entail considerable costs and, perhaps more worryingly, would establish disincentives to innovate and grow for many family-owned companies, a sector that employs 14 million people and represents about a third of UK GDP.”
Widening the PIE regime “would subject private companies to regulation that was designed for listed companies” even though they are generally structured completely differently, he said.
Instead of imposing more rules on private groups, Wates called on the government to evaluate the impact of new company reporting regulations introduced in 2019 and to work with private companies to address any gaps in the information being disclosed.
He said ministers should allow time “for good practice to spread” following his work to create the Wates principles. These are a voluntary set of corporate governance guidelines for large private companies published in 2018 with the backing of the Financial Reporting Council.
Supporters of the proposal believe the changes would increase the protection of stakeholders such as employees, pension scheme members and supply chains. But some companies, investors and accountants have raised concerns that the overhaul could stifle company growth and increase costs.
Separately, the Charity Commission opposed a proposal to extend the PIE definition to include large non-profit organisations and said it was not aware of failures in the charitable sector comparable to those in the corporate world.
The government said in a statement: “The largest private businesses have wide economic significance — often much greater than some listed companies — so designating them as public interest entities allows appropriate oversight to mitigate the risk of avoidable company failures and safeguard British jobs.”