Consultation: Water Governance Code Rule

Public trust in the water sector is low, and it is critically important to rebuild trust. Requiring high standards of governance in line with recognised good practice is a key element in helping to give stakeholders confidence that decisions are being made in the right way. This includes taking stakeholders' interests into consideration, as well as supporting corporate resilience, which are both critical aspects for a public utility.

Ofwat first started introducing governance standards for companies in the late 1990s, and most recently in the Board Leadership Transparency and Governance Principles (BLTGPs). However, requirements need to be further enhanced, in order to respond to scrutiny of the sector and evolutions in standard UK governance practices.

The new Water Governance Code will draw materially from the Corporate Governance Code which is widely recognised as being comprehensive. It is also well-established and includes best practice, and the majority of water companies already state that they voluntarily follow the Corporate Governance Code.

However, the Water Governance Code will also contain requirements bespoke to the nature of the water sector. For example, it will include relevant content from the BLGTPs and address the existing governance arrangements of water companies.

Through our proposals we also intend to further enhance the concept of water companies as standalone regulated entities within wider corporate groups, as well as underpin the important role an effective independent voice has on water company boards. This is critical given the particular responsibilities which water companies have to stakeholders and the environment as monopoly providers of an essential public service.

2. Intended outcomes from the new code

2.1 Up to date bespoke and comprehensive governance requirements

As public utilities and stewards of a natural resource, water companies have a vital role in our communities and society, and companies also have multiple stakeholders to whom they need to be accountable. It is therefore important that the water sector has appropriate governance standards to support this. In this context, we propose to update our governance requirements, currently set out in our BLTGPs, so as to reflect latest good practice in UK corporate governance. In addition, our new code will include appropriate additional areas to reflect the needs of the sector including drawing on relevant aspects of the BLTGPs.

2.2 High standards of decision-making fit for purpose for the water sector today

Water companies have to fulfil a wide range of regulatory responsibilities and take account of diverse stakeholder interests as part of their decision-making. Meeting different stakeholders' needs can be complex, and boards of water companies need to be composed effectively to be able to discharge these responsibilities. The objective challenge which independent non-executive directors (INEDs) can contribute to this is key. INEDs already play a crucial role in water companies and their board committees and these proposals build on this.

2.3 Enhanced understanding and accountability through increased transparency

It is intended that the Water Governance Code will provide the foundation for more transparent and effective reporting, through expanded explanations including for non-compliance. In turn transparency allows stakeholders and the regulator to understand companies' fulfilment of the requirements effectively and, where needed, challenge companies and hold them to account. This increased flow of information would enable the regulator to take further steps where reporting or actions are not sufficient, and also support any future evolutions to more supervisory regulation.