Corporate governance

On 10 December the FRC issued ‘The Wates corporate governance principles for large private companies’. Many private companies will use these, or refer to them, in the new mandatory reporting on corporate governance arrangements under the Companies Act for periods beginning on or after 1 January 2019. 

The new Companies Act reporting regulations introduce governance reporting requirements for private companies for the first time, and will represent a significant challenge for some, in terms of both governance procedures and reporting – especially where limited or informal governance arrangements currently exist. UK private companies that are over the relevant thresholds are caught by the regulations, from family businesses through to private equity portfolio companies and subsidiaries of multinational groups.

The Wates Principles have been drafted in a high-level way: designed to allow them to be applied in many circumstances, but it is likely that some businesses will not be in a position to apply all aspects of them (such as, in the case of a subsidiary, where matters are handled elsewhere in the group). This might lead some companies to choose to explain their own governance arrangements rather than apply a code or framework such as the Wates Principles, as is permitted under the regulations.

The final Wates Principles includes a section explaining how it should be used in reporting. Companies are encouraged to ‘apply and explain’ against the principles, and it is made clear that the guidance is not to be approached on a ‘comply or explain’ basis, as is required for the provisions of the UK Corporate Governance Code. In this way, it is hoped that ‘box-ticking’ will be avoided, leaving the focus on the principles. The Wates Principles are:

Principle Statement
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:
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 taking decisions.

Under each principle is ‘guidance’ which expands on and contains more specific recommendations in some cases. The main changes in the final guidance include:
  • More specific proposals on how to monitor corporate culture, and the need for whistleblowing arrangements (Principle One).
  • Greater encouragement for the separation of the chair and CEO roles (Principle Two).
  • Regular review of a company’s governance arrangements is emphasised as the responsibility of the chair and company secretary (Principle Three).
  • Both ‘emerging’ and ‘established’ risks are now referred to, and also ‘environmental, social and governance’ risks are specifically mentioned (Principle Four).
  • Reputational and behavioural risks associated with remuneration are now highlighted together with  mentioning the option of establishing a remuneration committee, and also of the potential for remuneration to be dealt with at a group level for subsidiaries (Principle Five).
  • An expanded section reflecting the Companies Act requirements on workforce engagement (Principle Six).
The focus on independent challenge in the boardroom is emphasised, under Principle Two in relation to the board and Principle Three for committees.