On Monday (10 December) the Financial Reporting Council (FRC) published the Wates Corporate Governance Principles for Large Private Companies (Wates Principles). These principles are part of a number of changes made this year to the UK corporate governance framework and have been developed by a coalition established by the FRC and chaired by James Wates CBE.
The Wates Principles provide a framework for business leaders to ensure that private companies are ‘well managed and aligned behind a clear purpose’. They do not override directors’ duties as set out in the Companies Act 2006, and are not intended as an interpretation of these duties either. However, they are intended to support directors to meet new obligations under the Companies (Miscellaneous Reporting) Regulations 2018, which require:
- Large private companies to explain in their annual report how directors have had regard to the matters set out in section 172(1) of the Companies Act 2006 (the duty to promote the success of the company for the benefit of its members as a whole) when making decisions. ‘Large private companies’ are (subject to limited exceptions) those which satisfy 2 or more of the following: (i) turnover of more than £36m; (ii) balance sheet of more than £18m; (iii) more than 250 employees; and
- Very large private companies to disclose their corporate governance arrangements for financial years beginning on or after 1 January 2019, including which corporate governance code has been applied. ‘Very large companies’ are those having either (i) a turnover of more than £200 million and a balance sheet of more than £2 billion, or (ii) more than 2,000 employees (or both).
The Wates Principles comprise six ‘flexible and high-level’ principles (with guidance) which aim to promote ‘the sort of transparency that can build the trust of stakeholders and the general public’. A company that adopts the Wates Principles should follow them using an ‘apply and explain’ approach in a way that is most appropriate for their particular organisation. Boards should consider and apply each of the principles individually so that they can then explain how their governance practices have addressed them (the guidance is intended to assist with this part).
- 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.
It is hoped that a wide range of companies (not just those included in the new legislative reporting requirement) will use the Wates Principles as an opportunity to demonstrate how they achieve long-term success through good practice. Reporting against these principles will take effect for financial years starting on or after 1 January 2019.
Kathryn Saunders