Regulator revamps board principles and signals licence changes are on the way

Following an extensive consultation and review period, Ofwat last week published its revised Board Leadership, Transparency, and Governance Principles.

Among the changes announced was a specific requirement for water company boards to establish their company’s purpose, strategy and values and to be satisfied that these and its culture reflect the needs of all those it serves. Boards will be expected to monitor and assess the culture and values of the company and take action where they are not aligned with its purpose.

Ofwat consulted on proposed revisions in July 2018. It has adapted its overall approach in light of responses, consolidating the "objectives’" and "main principles" it originally proposed into a single set of overarching objectives which companies must meet and explain how they have done so. It explained: “This change streamlines the principles as a whole and ensures that all stakeholders have greater clarity on what is expected from companies. The objectives are substantially principles-based and companies are responsible for meeting them.”

The objectives are:

1 – purpose, values and culture: the regulated company board establishes the company’s purpose, strategy and values, and is satisfied that these and its culture reflect the needs of all those it serves;

2 – standalone regulated company: the regulated company has an effective board with full responsibility for all aspects of the regulated company’s business for the long term;

3 – board leadership and transparency: the board’s leadership and approach to transparency and governance engenders trust in the regulated company and ensures accountability for their actions; and

4 – board structure and effectiveness: boards and their committees are competent, well run, and have sufficient independent membership, ensuring they can make high quality decisions that address diverse customer and stakeholder needs.

Each objective has an associated set of more detailed “provisions” companies are expected to meet.

The Principles were first introduced in 2014. Ofwat kicked off the review last year following public concerns over corporate behaviours in the water sector.

The new principles will come into effect from 1 April 2019. Ofwat is proposing to consult further, in spring 2019, on amending companies’ licences to make the objectives mandatory. It explained: “We intend to pursue the introduction of a licence condition to meet the objectives set out in the principles. Streamlining the principles addresses some of the concerns raised by respondents, and we do not consider other arguments put forward by respondents against the inclusion of a licence obligation to meet the principles are compelling.” It added: “Subject to the licence modification process that we plan to initiate in the spring, we will aim for the licence condition to be effective from summer 2019.”