BlackRock announced this week that it will redouble its focus on sustainability, and ask its investee companies to report on climate change issues in line with demanding international standards. That announcement is another reminder that all large businesses are under increasing pressure to provide detailed disclosures on how they perform against a number of environmental and social metrics, and how their governance processes support stakeholder engagement and informed and enlightened decision-making. Large private companies are far from immune from these global trends: private equity firms face increasing pressure to ensure that portfolio companies fully comply with emerging legal rules and social norms. That pressure will continue to mount this year.

2020 will certainly be an important year in the UK. New laws – and a new Corporate Governance Code for Large Private Companies (the “Wates Principles”) – mean that many private equity investors, and particularly the nominated directors that sit on portfolio company boards, will need to pay attention to the quality of the annual report. As we reported at the end of last year, some private equity-backed companies are already behind the curve, with only 53% of those assessed for compliance with the UK’s Walker Guidelines achieving a rating of “good” or better. The bar is being raised significantly this year – and not only for firms covered by the Walker Guidelines. For example, new mandatory reporting requirements will apply to any UK company with over 250 employees, and large companies will have wider stakeholder and governance reporting to deal with. Those that choose to follow the Wates Principles will have to explain in detail how they have complied.

It is not yet clear how much scrutiny there will be of the reports published by private equity-backed companies when they start to appear later this year, but firms should be prepared to defend their approach. In that regard, a report published by the Financial Reporting Council (FRC) last week could be a useful guide to the types of questions that may be asked. The FRC’s Annual Review of the UK Corporate Governance Code highlighted some areas where the reports of UK-listed companies were deficient.

UK companies that will be required to show how they have taken account of stakeholder interests in board decisions will note that the FRC expects these disclosures to go beyond a list of engagement tools – such as employee and customer surveys – and wants company reports to “cover the concerns raised by stakeholders, how companies have understood the issues, and how they have thought carefully about how these impact on the long-term success of the company”. Workforce engagement is a particularly important feature of the new requirements and companies must be prepared to explain how they have taken account of employee views.

The new reporting requirements will require “very large companies” to report in detail on their corporate governance arrangements and private companies are strongly encouraged to adopt the Wates Principles. If they do, they will have to set out the company’s purpose: “Effective boards ensure that the company operates with a clear sense of purpose and collective vision”. Articulating such a clear purpose may well occupy some board time this year and, in their review of listed company reports, the FRC notes that “too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit”. Those reading portfolio company reports will, the FRC says, expect to see something that is connected to the business model and informs the company’s mission and vision. A clear description of a company’s “unique contribution to the market they operate in, their stakeholders, and society at large” is identified as good practice. Discussion of culture and values is also important and should relate to this purpose, and the FRC was disappointed that more listed company boards were not receiving “culture reports” to aid discussion and decision-making.

The Wates Principles also require companies to explain how they have promoted diversity and inclusion, particularly in board composition. The FRC notes that many companies have focused on gender, but urges them to go further and consider, for example, ethnic, age, disability and LGBT+ diversity.

Crafting these narrative reports will not be straightforward, especially when done for the first time, and preparing the ground by reinvigorating the initiatives that will underpin the disclosures is likely to be a priority for company Chairs in the coming months.