BY FIONA GRAHAM, IFB EXTERNAL AFFAIRS AND POLICY DIRECTOR
In 2017, the Department for Business, Energy and Industrial Strategy launched a Green Paper, exploring options to expand the corporate governance requirements for larger private companies. The Companies (Miscellaneous Reporting) Regulations 2018 that followed requires large private companies to publish a statement on their corporate governance arrangements, for example if they follow a specific code.
Alongside this, the Government asked Sir James Wates CBE to head up a coalition which would develop a new set of corporate governance principles for private companies, to support them in reporting in line with the new requirement. The IFB was part of this coalition, alongside the CBI, Institute for Business Ethics, TUC and others. In December 2018, the Wates Corporate Governance Principles were published, and companies began reporting from their 2019 financial year.
While the pandemic delayed the first year of reporting, the Financial Reporting Council has now published an in-depth assessment, conducted with the University of Essex, of uptake and quality of reporting on the Wates Principles.
On the research, Sir James Wates said:
“This research gives us a valuable insight into how the Wates Principles are being applied, in particular providing the timely and rigorous analysis we need to inform public policy decisions about corporate governance. The research shows companies are grasping the spirit of the Wates Principles, and I would expect them to use this report to guide continual improvements in their reporting.”
The Wates Principles
The six principles are:
- Principle One – 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.
- Principle Two – 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.
- Principle Three – Director 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.
- Principle Four – 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.
- Principle Five – 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.
- Principle Six – 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 making decisions.
Companies that adopt the Wates Principles should follow them using the ‘apply and explain’ approach ‘in a way that is most appropriate for their particular organisation’. This means not only should businesses apply the Principle in practice, but in their reporting, they should provide a statement that explains how their corporate governance policies and processes operate and how this supports each Principle. This approach was taken to avoid tick box reporting, and rather encourage discussion and improvement by companies adopting the Principles.
The research found that:
- The Wates Principles were the most widely adopted corporate governance code, with 348 companies adopting them – meaning 77% of companies that adopted a code chose the Wates Principles.
- Companies were most likely to explain how Principles Three and Six were applied, and least likely to explain how Principle One (Purpose and Leadership) was applied.
- The highest average level of disclosure was on Principle Four (Opportunity and Risk).
- More than half of companies (51%) explained their culture.
- 75% of companies disclosed general information about their board’s balance and diversity, and most disclosed information about the board size and structure.
- Around 80% of companies disclosed information related to the accountability of directors.
- A ‘significant number of companies provided information about the channels used to communicate information on principle risks and risk appetite.
- 91% of companies provided information on who their key stakeholders were. Only 20% of companies discussed the dialogue the board had with these stakeholders.
- On average, reports were less than 2,000 words.
This first piece of research on the Wates Principles reflects what we have heard in many of our discussions with family firms – that the Principles have supported them in reflecting on, and improving, the governance arrangements in their firms. The response to the Principles in this first year has been very positive and provides a good grounding to continue an iterative process of reflection and improvement.
In his foreword to the Principles Sir James said “My hope is that a wide range of companies – and not just those included in the new legislative requirement to report on their corporate governance arrangements – will use the Wates Principles.” The Principles were designed to support businesses to improve their corporate governance, providing a clear framework and guidance that would be helpful to private firms of all sizes and complexities. I hope that this research is helpful to those firms which aren’t legally required to report, to understand better how larger firms are applying the Principles in practice and to learn from the examples of best practice given.
For those companies reporting against the Wates Principles this research will help them identify areas for improvement. For those larger companies who have not yet adopted the Wates Principles, this research should also demonstrate that this reporting is an opportunity for reflection and improvement, not a burden.
The Wates Coalition will continue to review the application of the Principles, and the quality of reporting. In 2022 the group will consider whether further work is needed on the Principles.