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Governance bodies offer help to small firm directors

14 'guiding principles' for directors in unlisted companies published

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Fourteen guiding principles to be used by directors in unlisted companies have been published to address the "neglected" needs of those firms. Trade bodies representing directors are behind the publication.

The European Confederation of Directors’ Associations (ecoDa) and the UK's Institute of Directors (IoD) have published the principles in the hope that they help smaller companies to make sure that they are properly run. The guidance is for unlisted companies, meaning those whose shares are not traded on a stock market.

"The corporate governance needs of unlisted companies have, to date, been relatively neglected by governance experts as well as by policy-makers," said the guidance (45-page / 1.9MB PDF). "In particular, the UK Corporate Governance Code is primarily aimed at listed rather than unlisted enterprises."

The guidance explains that corporate governance for small and unlisted companies is very different to that for large, traded corporations.

"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," it said. "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.

It outlined why running a company in the proper way is, if anything, more important for smaller firms than larger ones.

"Good corporate governance is particularly important to the shareholders of unlisted companies," it said. "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."

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

The guidance is based on EU-wide principles developed by ecoDa. The IoD has adapted it for the UK market. It outlines the duties of company boards and advises on their size; advises on structures that family-owned companies should adopt; and includes advice specific to larger or more complex companies.

"Of the UK’s 2.6 million registered companies, most are not listed or quoted on tradable equity markets," said IoD director general Miles Templeman. "The overwhelming majority are SMEs or start-up companies that remain under the ownership and control of the founder or founding family."

"The financial crisis has provided a stark reminder of the need for a robust governance framework in the global banking sector. However, good governance is not only relevant for financial institutions and large listed companies," he said. "The IoD is convinced that appropriate corporate governance practices can contribute to the success of UK companies of all types and sizes, including those that are unlisted or privately held."

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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