Subsidiary governance reporting
14 January 2026
All companies that exceed certain thresholds are required to disclose their corporate governance arrangements in their annual reports and on their websites, in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. This, at present, includes subsidiaries, even where the parent reports on its own governance.
Background
A subsidiary incorporated or registered in the United Kingdom (UK) is a separate legal entity. Directors of subsidiaries owe separate duties to their own company even if they are also directors of a parent. Regulation of this includes directors’ duties and responsibilities under the Companies Act and The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
Under The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, a subsidiary is required to disclose its corporate governance arrangements in its annual report. This disclosure must also be made available on the company’s website (if the full annual report is not already published on their website). The requirement applies if it exceeds one of the following thresholds in both this and the preceding financial year:
- It has more than 2,000 employees.
- It has a turnover of more than £200 million and a gross balance sheet assets of more than £2 billion.
The subsidiary cannot claim any exemptions, regardless of whether its parent group is required to disclose corporate governance arrangements in its own annual report.
What does this mean?
The reporting requirements are similar to those for listed companies, though less prescriptive. Subsidiaries are required to:
- State which corporate governance code was applied.
- Describe how they applied the principles.
- Provide reasons for any departures from the chosen code.
If a subsidiary does not apply a corporate governance code, it must explain the reasons for that decision and outline the corporate governance arrangements that were applied during the year, which, if done properly, is close to writing its own corporate governance code.
When preparing corporate governance reports, subsidiaries must disclose their own governance arrangements, not those of their parent companies. While these can be similar and subsidiaries can rely on the parent’s arrangements, the disclosures must still be those of the company disclosing and relate to its own decisions. They cannot simply refer to parent arrangements.
What does a subsidiary need to consider when choosing a corporate governance code or arrangements?
There is no standard approach to how subsidiaries should implement their corporate governance arrangements. However, three commonly preferred approaches are typically adopted by large subsidiaries whose parent companies are listed on a regulated stock exchange, such as the London Stock Exchange or Euronext Paris, and large subsidiaries of UK or foreign parent companies.
The Review of Reporting Against the Wates Principles, published by the Financial Reporting Council, found that around 1,250 companies (69% of those within scope) disclosed their corporate governance arrangements in 2021/2022. Of these, 44% reported adopting the Wates Principles, while 11% adopted the applicable elements of the UK Corporate Governance Code.
1. Adopting the Wates code
The Wates Corporate Governance Principles for Large Private Companies (the Wates Code) offers an 'apply and explain' approach, consisting of six principles and accompanying guidance. This guidance provides high-level advice on how companies can apply the principles. Companies that adopt the Wates Code are required to explain how they have applied these principles through their own corporate governance arrangements.
2. Adopting a parent company’s corporate governance code
Large subsidiaries may adopt the same corporate governance code as their parent company, particularly when the parent is listed on a regulated stock exchange and required to comply with a designated governance code under relevant listing rules. For example, large subsidiaries whose parent companies are listed on the Main Market of the London Stock Exchange may choose to adopt the UK Corporate Governance Code.
When preparing disclosures, subsidiaries must explain any departures from the chosen code, especially where certain provisions apply only to listed companies. While not required under the Regulations, large subsidiaries may nonetheless need to disclose a compliance statement if their chosen corporate governance code stipulates it.
Codes designed for listed companies, however, tend to include provisions which are impractical or less necessary for subsidiaries, particularly in areas such as remuneration. In these areas, subsidiaries should explain what provisions are applied at their level and which provisions are delegated to group organs and how these are reviewed or considered for appropriateness by company directors at the subsidiary level.
3. Creating a Tailored Governance Code
Large subsidiaries may develop their own corporate governance arrangements/code, ensuring compliance with legal requirements under the Companies Act.
Governance arrangements | Suggested disclosures |
Board composition*. A director nomination policy or practice should be established to guide the nomination and selection process, describing whether and how relevant diversity and inclusion requirements are applied and an appropriate balance of skills to support the strategic objectives of both the subsidiaries and their parent companies is maintained. |
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Director duties and responsibilities. A clear policy, such as terms of reference, should be in place to define directors’ duties and responsibilities. The policy should support effective decision-making, prevent conflicts of interest, and set out delegation of authorities and meeting procedures. |
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Risk management and internal controls. Subsidiary boards are responsible for overseeing risk management and internal controls and identifying principal and emerging risks. |
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Remuneration*. A remuneration policy should be in place to outline the authority, duties, and responsibilities for approving pay structures for directors and the wider subsidiary workforce. While this should outline general principles no specific disclosure of remuneration is required by this provision for private companies. |
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Delegation of authority. A policy should set out to identify individuals authorised to make decisions under delegated authority from subsidiary boards, aligned with the group governance framework set by the parent companies and it should be clear what roles the subsidiary board delegates to group committees or staff. |
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*Disclosures may be impractical or less necessary for subsidiaries, as matters related director appointments and remuneration are managed by their groups. If this is the case, subsidiaries should disclosure their governance arrangements and state which governance arrangements have been managed by their groups.
While subsidiaries may delegate certain duties and responsibilities to their parent company, some matters must remain reserved for the board to ensure the company’s best interests are upheld. These include statutory duties under sections 171–177 of the Companies Act, which must be considered and decided by the board itself.
Sections 171–177 of the Companies Act cover directors’ general duties, including matters relating to, but not limited to, duties to act within powers in accordance with their company constitutions, to exercise reasonable care, skill and diligence and to avoid conflicts of interest.
Practical considerations: Preparing a statement of corporate governance arrangements
When preparing its statement of corporate governance arrangements, here are some practical tips for making your reporting useful and informative.
- Present information in three sections: (1) state which corporate governance code was applied and why, (2) describe how the principles were applied, and (3) provide reasons for any departures from the chosen code.
- Preparers must consider that the subsidiary is a standalone legal entity and assess which the corporate governance arrangements apply specifically to the subsidiary, not its parent company.
- Extract information from governance documents (i.e. articles of association and terms of reference), board papers and minutes to provide company-specific examples of how principles were applied.
- Particularly where a parent code is used, clearly state why certain provisions of the chosen code do not apply. For example, if the provisions are relevant only to listed companies, or if they conflict with specific regulations.
- Companies are required to publish their corporate governance requirements on their website. This can be done as a separate document or by publication of the entire annual report. Merely filing the annual report at Companies House is not sufficient.
Where can I get more guidance?
The specific legal requirements for reporting of corporate governance arrangements can be found in The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
The FRC published the UK Corporate Governance Code 2024 and its accompanying Guidance in January 2024. Companies can also access The Wates Corporate Governance Principles for Large Private Companies on the FRC website.
For companies which depart from provision(s) of their selected code, they may follow the FRC guideline on Improving the Quality of Comply or Explain Reporting published in February 2021.
Who is applicable to?
Companies that exceed one or both of the following thresholds in each of the two preceding financial years are required to disclose their corporate governance arrangements in their annual report, in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
- More than 2,000 employees
- Turnover exceeding £200 million and a balance sheet total exceeding £2 billion
Note these thresholds apply to the company specifically and, unlike many other Companies Act provisions, not to the group of which the company heads. This can result in multiple companies within a group having to report and, for instance, service companies with which employment contracts sit reporting specifically on employee issues of governance, whereas other companies within the group would report on other elements of business management.
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