The Financial Reporting Council (FRC) issued its long-awaited corporate governance standards for private companies on 10 December, which provides a framework to help the companies meet legal requirements and improve and disclose their governance.
The Wates Principles, as they are called, encourage private companies to adopt a set of key behaviours “to secure trust and confidence among stakeholders and benefit the economy and society in general,” according to the press release announcement.
By explaining the application of these Principles, large private companies will also be able to meet their obligations under The Companies (Miscellaneous Reporting) Regulations 2018, part of a package of new regulations that have been issued for private enterprises. These regulations require all companies of a significant size that are not currently required to provide a corporate governance statement to disclose their corporate governance arrangements as set out in the first box below.
“Good corporate governance is not about box-ticking. It can only be achieved if companies think seriously about why they exist and how they deliver on their purpose then explain – in their own words – how they go about implementing the principles. That’s the sort of transparency that can build the trust of stakeholders and the general public.”
James Wates CBE, Chairman, Wates Group
The new corporate governance reporting requirements in the Wates Principles will apply to company reporting for financial years starting on or after 1 January 2019. Membership of the coalition group chaired by James Wates included the Confederation of British Industry, the Climate Disclosure Standards Board, the Institute of Business Ethics, ICSA: the Governance Institute, the Institute of Directors, the Investment Association, and the Trades Union Congress.
Extract from The Companies (Miscellaneous Reporting) Regulations 2018
- The directors’ report must include a statement (a “statement of corporate governance arrangements”) which states:
- which corporate governance code, if any, the company applied in the financial year,
- how the company applied any corporate governance code reported under sub-paragraph (a), and (c) if the company departed from any corporate governance code reported under sub-paragraph (a), the respects in which it did so, and its reasons for so departing.
- If the company has not applied any corporate governance code for the financial year, the statement of corporate governance arrangements must explain the reasons for that decision and explain what arrangements for corporate governance were applied for that year.
The genesis of the principles lies in the collapse of private company BHS, which led to tens of thousands of employees losing not only their jobs but their pensions—a case that is still being prosecuted, with former “owner” Dominic Chappell due for sentencing for one part of his crimes in the next few days. The fallout from BHS led the government to reconsider the privileges of limited liability status and the lack of reporting and accountability requirements for private companies compared to publicly listed companies. While their private ownership meant they had no reliance on public equity, the economic and social significance of large private companies was seen to be as great as publicly listed companies. When problems occur, the risks to as wide a range of stakeholders are also comparable.
“Large private companies impact widely on society and play an important role in the U.K. economy. Through promoting positive corporate behaviours these principles have the potential to help restore trust in business and contribute to long-term sustainable growth in the U.K. economy.”
Stephen Haddrill, CEO, FRC
In commissioning the principles, it was noted that they could not remove the risk of serious corporate failings, but they were needed “to raise awareness of good practice and, over time, help to improve standards of corporate governance in private companies, large and small,” according to the Department for Business, Energy and Industrial Strategy’s response to the government’s green paper on governance.
The application of the Wates Principles is distinct from the “comply and explain” approach used by the United Kingdom’s corporate governance code. Companies are required to follow them using an “apply and explain” approach in a way that is most appropriate for their particular organisation. Boards are encouraged to apply each principle, says the FRC, by “considering them individually within the context of the company’s specific circumstances. They should then be able to explain in their own words how they have addressed them in their governance practices.”
The six Wates Principles
- Purpose and Leadership – An effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
- Board Composition – Effective board composition requires an effective chair and a balance of skills, backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
- Board Responsibilities – The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.
- Opportunity and Risk – A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks.
- Remuneration – A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
- Stakeholder Relationships and Engagement – Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.
The Wates Principles do not set out detailed provisions but offer guidance under each principle. This guidance is provided to assist companies in explaining their approach to applying each principle appropriate to their circumstances, but the guidance does not need to be reported on in the same way as the provisions in the Corporate Governance Code are.
The broad principles with supporting guidance approach of the Wates Principles is so companies will move beyond a “tick box” (or check box) mentality and describe and explain how the implemented practices achieve the principles and demonstrate the outcomes. This should result in increased transparency for stakeholders, especially if statements link to other reporting requirements, such as information which may be in the strategic report or other company documents. Companies are expected to “provide a supporting statement that gives an understanding of how their corporate governance policies and processes operate to achieve the desired outcome for each Principle,” says the Principles.
Large private companies are also required to explain how they have engaged with suppliers, customers, and others in a business relationship with the company. The Department for Business, Energy and Industrial Strategy has said that if this information is in its strategic report statements or its directors’ report, it does not need to be duplicated to explain application of the Wates Principles, therefore cross-referencing is encouraged.