Ofwat proposes changes to governance principles

Ofwat has revealed four proposed changes to its 2014 principles for board leadership, transparency and governance.

The regulator says its current principles aim to bring the water sector in line with the high standards of corporate governance expected of a monopoly provider of an essential public service.

A new consultation, which forms part of a programme of work set out by the regulator in April this year, also includes potential changes to water companies’ licences.

It is hoped this consultation will challenge companies to rebuild legitimacy.

But ratings agency Moody’s said the impact remains “credit negative”.

There are four proposed revisions and objectives to the principles and companies’ licences including:

• 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.
• 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.
• 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.
• 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.

Alongside the changes the regulator is proposing that all companies should have a licence condition to meet these principles.

Ofwat chairman Jonson Cox says it is only right that those at the top of water companies should be “fully accountable” for how their business is run.

He said: “Water is a vital public service like no other. Holding a licence to provide water is a privilege.

“It is only right that those at the top of water companies should be fully accountable for how their business is run and that water companies themselves are held to higher standards than any ordinary business.

“The revised principles we are consulting on will continue to drive the highest standards of board leadership and decision-making across the water sector, which in turn forms part of our ongoing work to make sure that water companies put customers at the heart of everything they do.”

Cox has previously written to environment secretary Michael Gove, setting out the regulator’s agenda for improving corporate behaviours.

In response to the latest proposals international ratings agency Moody’s said the published decision is in line with Ofwat’s original consultation but believes the impact remains credit negative.

In a report published yesterday (10 July), it said: “The threshold at which sharing of perceived outperformance from high gearing will be applied has increased to 70 per cent, compared to 65 per cent as indicated in Ofwat’s consultation document.

“While the threshold level of gearing is now higher, the overall impact is unchanged.

“Specifically, outperformance sharing relating to high gearing will reduce allowed returns and curb earnings for highly leveraged companies, a credit negative.”

Meanwhile Steve Hobbs, senior policy manager at the Consumer Council for Water, said: “If water companies are serious about increasing public trust in the sector their Boards need to be focused on delivering a great service for their customers and value for money.

“They also need to reflect the highest standards of corporate behaviour for what remains a monopoly business.

“We’ll be examining Ofwat’s proposals closely to ensure they meet these expectations but we think it’s a good move to make it a licence requirement for companies to adhere to them.”

Ofwat’s consultation will run until 21 August.