Corporate Governance Guidance for Entrepreneurs

Corporate Governance Guidance for Entrepreneurs

On 8 April 2010 the European Confederation of Directors Associations (ecoDa) issued one of the first ever detailed guidance notes for unlisted companies on corporate governance. Entitled Corporate Governance Guidance and Principles for Unlisted Companies in Europe: an initiative of ecoDa, the guidance is voluntary and sets out 14 principles of good governance, 9 of which are intended for all unlisted companies and another 5 for large or complex companies.

The detailed principles are set out in our briefing note: Corporate Governance Guidance for Entrepreneurs

Noting that unlisted companies account for more than 75% of European GDP, ecoDa observes that the financial crisis has highlighted the importance of applying good practices and that corporate governance considerations should not be restricted to listed companies which are generally subject to compulsory rules in this area.

Many unlisted enterprises are of course owned and controlled by small shareholding groups or families and ecoDa notes that good corporate governance here is not primarily concerned with the relationship between boards of directors and external shareholders (as in listed companies), 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.

Areas highlighted include:

  •     The importance of establishing an appropriate constitutional and governance framework – for UK companies this means adopting suitable articles of association and may also include considering a shareholders agreement to regulate the relationship of the shareholders.
  •     The desirability of a suitable board of directors, reflecting the scale and complexity of the company’s activities including, for larger companies, consideration of non-executive directors.
  •     The need for suitable systems and internal controls to deal with risk management.
  •     The value of directors receiving induction on joining the board and regular updates and refreshing of their skills and knowledge – in the UK this is particularly pertinent with the recent implementation of the Companies Act 2006.

ecoDa stresses that these guidelines are not intended to be a straightjacket for unlisted companies. It states that “unlisted companies should exercise common sense in their implementation, and ensure that their response is both proportionate and tailored to the specific needs of their organisation.”

Corporate partner Richard Baxter comments:

“While entrepreneurs will understandably wish to maintain flexibility and avoid red tape, this guidance by ecoDa is welcome acknowledgement of the benefits of running fast growth and other unlisted companies well. These businesses often lack the in-house infrastructure to assist with corporate governance, but they will find it easier to attract funding and investment and will be more attractive to purchasers if time is found to consider these principles and apply them where appropriate.”

Further information and guidance on corporate governance is available from Richard Baxter or through your usual contact at Stevens & Bolton LLP.

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