Water regulator Ofwat has today published its revised board leadership, transparency, and governance Principles. First introduced in 2014, Ofwat launched a review of its Principles last year, following public concerns raised over corporate behaviours in the water sector.

Among the changes announced by the regulator is 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.

The new principles will come into effect from 1 April 2019 - however, Ofwat is proposing to consult further on amending companies’ licences to make the objectives mandatory and intends to kick-start this process in spring 2019.

The board leadership, transparency and governance framework is made up of four overarching objectives, which are each accompanied by guiding provisions.

Under the framework, companies are responsible for delivering the objectives and explaining how they have done so.

Ofwat said that there may be limited circumstances where a company’s approach is not in line or even conflicts with a provision, or where they temporarily do not adopt a provision. Where this is the case, the companies will be required to fully explain how their arrangements overall successfully deliver the objectives.

The Principles seek to ensure that individual water companies operate in effect as a standalone regulated company with an effective board which has full responsibility for all aspects of the regulated company’s business for the long term.

Under the Principles, the board of the regulated company will need to:

• fully focus on the activities of the regulated company;
• take action to identify and manage conflicts of interest, including those resulting from significant shareholdings;
• ensure that the influence of third parties does not compromise or override independent judgement

The water companies will also be required to provide:

• An explanation of group structure;
• An explanation of dividend policies and dividends paid, and how these take account of delivery for customers and other obligations (including to employees);
• An explanation of the principal risks to the future success of the business, and how these risks have been considered and addressed;
• An explanation of the company’s executive pay policy and how the criteria for awarding short and long-term performance related elements are substantially linked to stretching delivery for customers and are rigorously applied.

Ofwat also wants to see an annual evaluation of the performance of the board, including the balance of skills, experience, independence and knowledge, its diversity, how stakeholder needs are addressed and how the overarching objectives are met. The approach must be reported in the annual report and any weaknesses acted on and explained.

The regulator has opted a principles-based approach rather than more prescriptive rules to better reflect companies’ individual circumstances.

The approach to reporting is not the same as the UK Corporate Governance Code’s “comply or explain” approach, where companies either comply with a provision or provide an explanation for not doing so. Instead, companies must meet the objectives and set out how they have done so.

Commenting on its approach, Ofwat said:

“We do not consider an overly prescriptive approach is right for this sector because we want companies to take full ownership. Being too prescriptive also risks stifling innovative approaches and we consider it appropriate to give the sector space to adapt further and evolve to meet the legitimacy challenge.

“We consider transparent reporting should enable customers and other stakeholders to challenge poor practices and incentivise companies to strive for the highest standards.

Although the regulated company is a monopoly for almost all of the services it provides, on reflection we consider the key characteristic that should be reflected in the company’s purpose is its role as a provider of an essential public service and have amended the provision to reflect this.”

The regulator also wants to see companies consulting with a wide range of stakeholders.

The 2014 principles will remain in place until April 2019 and companies will report against these in their 2019 annual performance reports.

When companies report in 2020 Ofwat will then consider their arrangements in the round entirely against the 2019 principles.

Click here to download Board leadership, transparency and governance – principles

Click here to download Board leadership, transparency and governance – conclusions on revising the principles