The Wates Principles of Corporate Governance for Large Private Companies
The recent corporate failures have drawn public attention to the lack of transparency and accountability in many large companies, and the risks that business failure poses to employees, suppliers, customers and other stakeholders. Traditionally, the UK corporate governance has focused on transparency, accountability and stakeholder engagement in large public companies. The UK Corporate Governance Code (currently under revision), which is binding on a ‘comply or explain’ basis to premium-listed companies, has many provisions that are unsuitable to other large public or private companies. Such companies, however, constitute a vast portion of the UK economy, and their actions have a significant impact on their stakeholders and wider society. Consequently, the need arose for an additional set of corporate governance principles designed to promote responsible business practices and long-term value in large private companies.
The 2016 Green Paper consultation on Corporate Governance Reform considered the role of corporate governance in large private companies and asked whether such companies should be required to meet minimum governance and reporting standards. In April 2017, the Business, Energy and Industrial Strategy Committee of the House of Commons noted in its Corporate Governance Report that private companies with a significant presence in the community should be required to report on non-financial matters for the benefit of their employees and other stakeholders. The Committee recommended that the Financial Reporting Council (FRC) and others develop an appropriate corporate governance code with which these companies would be expected to comply. Subsequently, in its Response to the Green Paper consultation published in August 2017, the Government argued that the case had been made for strengthening the corporate governance framework for large private companies, and invited the FRC to work with relevant industry partners to develop a voluntary set of governance principles for large private companies. It also announced its intention to introduce secondary legislation requiring all companies of a significant size to disclose, inter alia, their corporate governance arrangements.
Following these developments, in early 2018 the FRC established the Coalition Group, comprising senior representatives from various organisations and stakeholders including the FRC, the British Private Equity and Venture Capital Association, the Confederation of British Industry, ICSA, the Institute of Business Ethics, the Institute of Directors and the Trades Union Congress. Led by James Wates CBE, the Group was charged with developing a set of principles promoting best practice in corporate governance and reporting arrangements of large private companies. On 13 June 2018, the FRC published the Wates Corporate Governance Principles for Large Private Companies, for public consultation. The consultation is seeking feedback on ten individual questions, which aim to determine whether the Principles are sufficiently comprehensive to be meaningful and robust, while retaining enough flexibility to enable widespread adoption. Comments are also sought on the ‘apply and explain’ approach and on practical solutions for monitoring the application of the Principles. The consultation closes on 7 September 2018, with the final version expected to be published in December 2018.
The Wates code has six principles. Each principle is stated and briefly explained, but there are no subordinated provisions for companies to comply with or against which to report. Instead, each principle is accompanies by supportive guidance, intended to assist companies to apply the Principles in practice. The six Principles are:
- Purpose: An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
- 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.
- Responsibilities: A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.
- Opportunity and risk: A board should promote the long-term 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 sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.
- Stakeholders: A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose.
The Principles are set at a high level of generality, in order to accommodate the variety of management and ownership structures present in large private companies incorporated within the UK. However, a company that adopts the Principles is expected to apply them fully, and to provide a supporting statement for each principle explaining how their corporate governance processes operate and achieve the relevant aims and outcomes.
The Wates Principles will facilitate compliance with the proposed requirement for certain large companies (which are not already required to provide a corporate governance statement) to disclose their corporate governance arrangements. The Companies (Miscellaneous Reporting) Regulations 2018, laid before Parliament on 11 June 2018, require such companies to publish in their directors’ report and on their website a statement about their corporate governance arrangements, including whether they follow any formal corporate governance code. The new reporting requirement applies to all companies that satisfy one or both of the following conditions: (i) have more than 2000 employees; (ii) have a turnover of more than £200 million and a balance sheet total of more than £2 billion. Companies will be able to adopt the Wates Principles as the appropriate framework when making this disclosure, but they will be free to apply other governance codes (such as the Corporate Governance Code developed by the Quoted Companies Alliance). In addition, the draft Regulations require companies of a certain size to publish a statement explaining how directors have complied with s. 172 (1) of Companies Act 2006, to provide details of the company’s engagements with employees, supplies, consumers and other relevant stakeholders, and to disclose the gap (‘pay ratio’) between the total remuneration of the chief executive officer and the median employee pay and benefits.
It is hoped that Wates Principles and the further disclosure requirements of the draft Regulations will help restore public trust in how big businesses operate and will encourage companies of all sizes to operate responsibly and foster long-term stakeholder relationships.