Ofwat consults on overhaul of corporate governance

Ofwat is consulting until 21 August on four updated principles on board leadership, transparency and governance, that it considers necessary to address legitimacy concerns in the sector and wider developments in corporate governance. It intends to embed the principles in all companies’ licences.

The principles are:

1. Purpose, values and culture –The board of the regulated water company sets the purpose, culture and values for the organisation, reflecting its position as a monopoly provider of an essential public service.

2. Board leadership and transparency – The board’s leadership and approach to transparency and governance engenders trust in companies and ensures that they can be held accountable for their actions.

3. Stand-alone regulated company – The board of the regulated water company has the power to set its long term direction, and to make, and be accountable for, all decisions regarding its regulated activities as though these are substantially its sole business.

4. Board effectiveness – Boards and their committees are competent, well run, and sufficiently independent, ensuring that they can make high quality decisions that address diverse customer and stakeholder needs.

Ofwat said its intention is “to provide a clear framework identifying objectives that all companies should achieve but that within this framework, companies should have autonomy and flexibility to deliver the highest standards of accountability and responsibility for their behaviour and outcomes, reflecting their own circumstances”.

Ofwat has proposed all companies should have a licence condition to meet these principles. If a company can’t deliver one aspect, it will need to clearly explain how the approach it is taking is in line with the spirit of the revised principles. Such alternative approaches should “be few in number for any particular company”.

In addition, Ofwat observed that some governance practices are “non-negotiable” and mooted a further licence obligation setting a minimum requirement for independent non-executive directors to be the single largest group on the board, as well as for all boards to be independently chaired.

Ofwat intends to publish a final set of principles in the autumn, with a view to them applying from early 2019. It will engage further with water companies about the wording of any licence changes in the autumn before proceeding to a formal section 13 consultation.

Once agreed, the changes will be applied to all 17 incumbent companies and Tideway. Ofwat has opportunistically already made the licence change for Hafren Dyfrdwy, Severn Trent Water and South West Water on the back of other structural activity, and has consulted on introducing the requirement into the licences of Thames Water and Portsmouth Water.