Ofwat has proposed a major overhaul of existing governance rules for water companies – stringent new governance rules would include a requirement for at least half of boards to be independent.

Ofwat is seeking views on the requirement for all water companies to have boards which include a greater proportion of  independent non-executive directors (INEDs) and whether an implementation date of 1 April 2028 is appropriate for companies which currently have a lower proportion of INEDs on their boards.

The water sector regulator has launched a consultation on the proposals, which also include banning independent non-executive directors (INEDs) and chairs from sitting on both a regulated water company’s board and its parent company board to reduce potential conflicts of interest.

The Water (Special Measures) Act 2025 gave Ofwat powers to introduce new rules on remuneration and governance. The regulator is now seeking comment on a wide range of governance issues – if implemented would bring about significant tightening up and toughing up in an updated governance code for the water sector.

Key questions Ofwat is seeking views on include:

• Do you agree that it is important to have a definition of independence for independent non-executive directors (INEDs)?
• Do you agree that the independence of an INED who also sits on the board of another company in the same group may be compromised?
• Do you agree with our proposal to prohibit individuals from being an INED on the board of a water company if they sit on the board or boards of other companies in the same group?
• Can share ownership impede actual or perceived independence? Should future allocations of shares to INEDs be prohibited?
• Do you agree with the characteristics which we think may impair independence, and which should therefore be subject to careful consideration by boards, and reported by companies if applicable?
• Do you agree that the definition of independence, and associated reporting obligations, should be consistent for INEDs and chairs?
• Do you agree with our proposals relating to multiple chair appointments? Are there other measures we should consider?
• Do you agree with a requirement for all water companies to have boards which include a greater proportion of INEDs? Is an implementation date of 1 April 2028 appropriate for companies which currently have a lower proportion of INEDs on their boards?
• Do you agree with the principle that audit, remuneration and nomination committees of water companies should not also serve the boards of other companies?
• Do you have views as to whether any of the proposals set out above would reasonably take longer than 1 April 2028 to implement?

Through the proposals Ofwat also intends to further enhance the concept of water companies as standalone regulated entities within wider corporate groups.

Ofwat points out that all water companies have at least one group company, saying that currently it is commonplace for INEDs who sit on the boards of water companies to also sit on the boards of the group company or other companies in the group. “This may create a conflict of interest, which can compromise the robustness of board decision-making,” the regulator says.

Ofwat’s proposed definition of independence would not allow individuals to act as INEDs for water companies if they also sit on the boards of other companies in the same group as the water company. 

Ofwat points out that one of the practical outcomes arising from its proposed ban on cross directorships, between water companies and companies in the same group, is that the chairs of the boards of water companies cannot chair other companies in the same group.

Owning shares

With regard to owning shares, the consultation document says that if INEDs own shares in group companies this could impair their independence, or be perceived as a barrier to their independence, because personal share ownership could incentivise share value above other considerations.

Ofwat says:

“Whilst it is recognised that some chairs and INEDs of water companies currently own shares in publicly listed companies in the same group as the water company, we propose defining independence in a way that prevents companies from making any future allocations of shares to chairs or INEDs, however acquired. “

Full definition of independence

Ofwat is proposing that the definition of independence in the Water Governance Code is divided into two parts.

Part one: code principle

Ofwat’s view is that some characteristics should automatically prevent an individual from being considered independent, and as such should prevent an individual from being an INED in a water company. The characteristics are as follows:

• sits on the board of another company in the same group;
• represents a shareholder of the company or group company;
• is or has been an employee of the company or group within the last five years;
• has or has had within the last three years, a material business relationship with the company, either directly or as a partner, director or senior employee of a body that has or has had such a relationship with the company within the last three years;
• directly and personally accrues shares in the company or in other companies in the same group;
• or has close family ties with any of the company's advisers, directors or senior employees.

Implementation date and transition period

It is proposed that the Water Governance Code will apply to companies in scope from the financial year beginning 1 April 2028. Once the finalised Water Governance Code has been published, the companies which will be subject to the code will need to identify what changes they need to make to their existing governance arrangements, and then map out the steps they need to take before 1 April 2028.

Closing date to submit responses to the consultation is 10 September 2026.

Click here to read the consultation documents on the Citizen Space consultation platform and submit a response Citizen Space consultation platform.