Water industry regulator Ofwat has launched a new consultation on corporate governance setting out its views on issues of Board leadership, transparency and governance.

Ofwat wants the water companies to voluntarily put self-regulatory codes in place by 1 April 2014,including any steps they need to take to fully meet the principles by 1 April 2015. However, the regulator has warned that if companies fail to meet expectations it will take steps to introduce its own licence conditions.

The regulator said that there “must be significant independent representation on the Board” and that the independent non-executive directors to be the largest single group on the Board, compared to executive directors and non-executive directors that are notindependent.

Ofwat said that while it acknowledged that investors (who own the business) have a legitimate place on the Board, the number of investor representatives should be no greater than the number of independents excluding an independent chairman. All directors should also attend and fully participate in each Board meeting – in Ofwat’s view regular use of alternates for Board members has a negative impact on the continuity and efficacy of the Board and there should be no routine place foralternates on companies’ Boards.

The group structure must also be explained in a way that is clear and simple to understand and that the structure of the group within which the company sits should be set out clearly and unambiguously. The regulator said that customers should expect to know how the group which contains their company is structured, especially as the corporate structure for some groups is complex.

In a letter to company chairmen introducing the consultation, Ofwat Chairman Jonson Cox said:

“There is significant public pressure on companies to operate to high standards of governance and transparently demonstrate that they do so. We have seen unwelcome criticism, in the media, of some companies’ Board leadership and governance arrangements. Some of that public criticism has been directed atindividual companies operating in this sector.”

“Our Board considers that a self-regulatory approach is preferable but this relies on companies responding promptly in the same vein.”

“It remains open to us, however, in the public interest to pursue licence modifications to secure the principles in companies’ licences if we find that a significant number of companies do not accept the approach set out in our principles or are not indicating an intent and plan to meet our minimum expectations in the timescale.”

“Early indications of a willingness to conform to our approach will enable Ofwat’s executive team to focus limited resources on non-conforming companies. Early adopters can be assured that, post consultation, Ofwat would not make later revisions which would cause such companies to regret having moved early.”

Ofwat has also been working separately with a group of investors to consider a series of principles that could be used as a guide at the holding company level and  expects to issue these  later this year.

Deadline for comments on the consultation is 31 October 2013. By 31 December 2013 Ofwat expects leading companies to put in place a code that sets out how they currently apply the principles and the timeframe in which they will fully adopt the principles. The regulator will confirm its final principles in January 2014.