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Nearly 70 years ago RE Thompson, a small British family business in Whitchurch, Hampshire, started making vacuum and leak test equipment. In 1968, it began to focus solely on manufacturing aerospace and industrial components. Today the business is still owned and managed by the Thompson family, but it produces the boxes that house the power management system of the F35 joint strike fighter, one of the UK’s biggest military procurement projects.
In the past five years it has invested £7m in equipment, doubled turnover and is on track to double revenues again. “The plant is already running 24 hours a day, seven days a week,” says Michael Thompson, managing director and a third-generation family member involved in the business.
RE Thompson is still a small business, turning over less than £20m a year with about 50 employees. But it is growing fast and to many observers it looks like a well-run company, balancing the long-term interests of staff, owners, customers and regulators.
Its governance, though, is very different from that prescribed in the UK’s corporate governance code for big, publicly quoted companies with their extensive boards of executive and non-executive directors. Mr Thompson and his wife are RE Thompson’s only directors.
In this regard, RE Thompson is like many UK companies that are not listed on tradable equity markets. They range from the John Lewis Partnership — employing thousands of staff — to private-equity owned ventures, family businesses and sole traders.
Many bigger private businesses do have multiple directors. John Lewis aims to comply with the rules that apply to listed businesses. It has 15 directors, two of whom are non-executives.
That is well beyond what is legally required. Section 154 of the Companies Act states only that private companies must have one director and that public companies must have two.
However, Susan Ralphs, managing director of the Ethical Property Company, says she could not do without her board of six directors, the other five of whom are non-executive. “The non-executives give us another level of expertise,” she says. “They are not immersed in the day-to-day but are still wedded to our success. They hold us [executives] to account and they represent our shareholders.”
The Ethical Property Company has ambitions ultimately to list on Aim, the London Stock Exchange’s junior market. It makes about £400,000 a year in pre-tax profits from renting property to voluntary organisations and developing eco-friendly buildings. In recent years it has raised about £14m from 1,400 shareholders in five issues and may well raise more, says Ms Ralphs. The company is part of the LSE’s Elite programme, which aims to promote better governance and help companies grow.
Even businesses that are not trying to raise capital will benefit from having external directors on boards, says the UK’s Institute of Directors. The effect on companies “should not be underestimated”, it says.
Oliver Parry, the IOD’s head of governance, argues directors with wide experience help managers spot problems, lessen wastage and prevent assets from being misappropriated. In essence, governance guards against rising agency costs, minimises risk and enhances the reputation and confidence in a group.
Effective governance frameworks define the roles and responsibilities and distribute power between shareholders, boards, managers and other stakeholders. “Especially in smaller companies, it is important to recognise that the company is not an extension of the personal property of the owner,” the IOD says.
The IOD set out a governance code for unlisted companies about six years ago. Now, in the wake of the scandal over the collapse of BHS, which has put jobs and pensions of thousands of workers in jeopardy, Mr Parry is working with Deloitte, the consultants, to beef it up.
“This is all about reputation — maintaining it and enhancing it,” says Mr Parry. The rate of high-profile insolvencies is, he says, feeding “a perception that companies are not being run very well and that something is systemically wrong with governance”.
Mr Parry acknowledges that the costs of implementing the full code could be punitive for small businesses. The IOD proposes a two-tier regime, he says, but the principles of good governance are the same for all companies, big and small.
However, not all private businesses are convinced of the need to have non-executive directors, as Mr Thompson points out.
“It may be a good thing to have a sounding board but it can be difficult and creates conflicts. I’d find an outsider [on the board] a hindrance,” says Mr Thompson.
Rise of voluntary compliance in US
Many so-called “Sox-lite” private US businesses have voluntarily adopted Sarbanes-Oxley, the regulatory regime introduced for public companies after the Enron and WorldCom accounting scandals to boost corporate accountability. These Sox-lite groups do so as a way of boosting investor confidence. A US study by PwC found that by 2012 four-fifths of unlisted companies had voluntarily adopted certain governance practices. When companies did not bring in directors from outside to provide independent voices, they still encouraged their executives to broaden their experience by joining boards of public companies, the study showed.