Wates corporate governance code for private companies finalised
The Financial Reporting Council (FRC) has published the final version of a new code for the corporate governance of large private companies, called the Wates principles, which can be used on an ‘apply or explain’ basis to meet new legal requirements and is intended to encourage greater transparency
10 Dec 2018
The principles were developed by a coalition group set up by the FRC and chaired by James Wates which was established in the wake of concerns around governance of private companies following the collapse of BHS.
They enable large private companies to meet their obligations under the Companies (Miscellaneous Reporting) Regulations 2018 which require all companies of a significant size, that are not currently required to provide a corporate governance statement, to disclose their corporate governance arrangements. The rules apply to all companies with more than 2,000 employees and/or a turnover of more than £200m, and a balance sheet of more than £2bn.
The six principles are:
- 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.
Reporting against the Wates principles will take effect on 1 January 2019. The FRC has adopted an ‘apply and explain’ approach, which means boards should apply each principle 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.
This approach differs from that in the UK corporate governance code, which includes provisions that a company should additionally comply with - or offer an explanation where it does not.
This was one of the issues which attracted the most comments in the consultation on the principles which ran from January to September, with opinion divided as to whether this was a higher or lower bar than ‘comply or explain’.
In retaining this approach, the FRC said it was the best option for a diverse group of companies, allowing them flexibility to report, and encouraging them to move beyond a ‘tick box’ approach to describing and explaining how the implemented practices achieve the principles and demonstrate the outcomes.
A number of respondents also felt that the draft principles did not recognise the importance of environmental and social issues, noting that such issues could impact on the long-term success of companies.
James Wates, chairman, Wates Group, said: ‘The Wates corporate governance principles are a tool for large private companies that helps them look themselves in the mirror, to see where they’ve done well, and where they can raise their corporate governance standards to a higher level.
‘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.’
Respondents to the consultation also commented that without some form of monitoring or an appraisal of the quality of the reporting it would be likely that many companies reverted to ‘boiler plate’ reporting. There were suggestions that company auditors, or the FRC, could take on responsibility for this.
Wates said: ‘We will only start seeing the first reporting against these in 2020, and it will take some years to develop an understanding of reporting trends and a body of good practice.’
Report by Pat Sweet