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The UK’s largest law firms could be forced to comply with an onerous new Corporate Governance Code under “comply or explain” conditions, according to Government plans published recently.The Corporate Governance and Directors Pay Review outlines the Government’s intention to develop a new Corporate Governance Code. It says that private companies with more than 2000 employees will be covered by the Code. The Review states that the Government is also considering extending similar measures to LLPs of the same size – which includes most of the UK’s Top 20 law firms. The Code will be developed by the Financial Reporting Council in collaboration with the Institute of Directors, the CBI, the Institute of Family Business, the British Venture Capital Association and others. It will be designed to strengthen the voice of employees and other non-shareholder interests at board level.
Gareth Ward, a partner at consultants Edward Drummond, says: 'Scandals such as BHS – which ultimately prompted the Government to take this action – have little to do with how big law firms are run. The issues that the Government is looking to tackle with this new Code are not issues that people have claimed applied to law firms so they must not accidentally be included. Should the Government decide to press ahead with its plan to extend the requirements to all LLPs, this would be excessive. It would mean law firms come under enormous pressure to comply with the new Code incurring substantial and unnecessary governance costs.'
If it echoes the UK’s existing UK Corporate Governance Code, law firms could find they have to provide transparency over the remuneration of senior executives. Corporates also have to agree to independent non-executives and a majority of non-executives on the senior board; publicise a description of the work of the nomination committee, including the processes it has in relation to board appointments, in company reports. Finally, the Code demands annual confirmation from directors that they have carried out a robust assessment of the principal risks facing the company – including threats to business model, future performance, solvency or liquidity. Mr Ward added: 'The plans would simply mean more bureaucracy for law firms. This is simply not necessary.' The FRC intends to consult on amendments to the UK corporate governance code in the late autumn.