The UK's Financial Reporting Council has published the final version of the Wates Corporate Governance Principles for Large Private Companies (Principles). The Principles have been developed following the Government's Green Paper in 2016 and the BEIS Select Committee report in April 2017 which considered the need for improved transparency and accountability in the corporate governance of large private companies.
James Wates CBE, who led the cross-industry group that developed the Wates Principles, commented:
"The Wates Corporate Governance Principles for Large Private Companies provide a tool to help large private companies look themselves in the mirror, to see where they have done well and where they can raise their corporate governance standards to a higher level. This can in turn result in better engagement with their stakeholder base and ultimately build trust".
6 key Principles
There are 6 key Principles which focus on fundamental aspects of business leadership and performance. These are largely unchanged from the consultation launched in June 2018, apart from a new emphasis on the board's responsibility for the development of the company. Each Principle is supported by guidance designed to assist companies apply the relevant Principle in practice.
The Principles note that a "one-size-fits-all" approach to corporate governance in large private companies is not appropriate. The Principles are not intended to be a checklist. Instead, companies will be encouraged to describe and explain how the implemented practices achieve the Principles and demonstrate the outcomes. Companies will be expected to adopt the Principles on an "apply and explain" basis. The Principles also confirm that they do not override or interpret directors' duties contained in the Companies Act 2006.
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.
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.
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.
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. This Principle has been amended from the consultation version to specifically refer to the workforce.
Other corporate governance codes
Other corporate governance codes include the UK Corporate Governance Code and the QCA's Corporate Governance Code. Large private companies can select any of these governance codes and should consider which is the most suitable for them.
The succinct, high level nature of the Principles will make them an attractive option for large private companies tackling formal compliance with a corporate governance code for the first time. Guidance contained in the Principles is designed to help companies understand how they can apply the Principles, rather than being unduly prescriptive.
New corporate governance reporting requirement
A new corporate governance reporting requirement introduced by the Companies (Miscellaneous Reporting) Regulations 2018 will apply to all companies that satisfy either or both of the following conditions:
• more than 2,000 employees; or
• a turnover of more than £200 million and a balance sheet over £2 billion.
The directors’ report must include a corporate governance statement which states:
• which, if any, corporate governance code the company applies;
• how the company applies that code; and
• if the company departs from that corporate governance code, how it did so and why.
If no corporate governance code has been applied, the statement of corporate governance must explain the reasons for that decision and the corporate governance arrangements which have been applied.
The reporting requirements will come into force on 1 January 2019 applying to financial years beginning on or after 1 January 2019, with reporting effectively commencing in 2020 for the previous year.
The Principles are expected to become the preferred corporate governance framework for large private companies.
Our Corporate Timeline of Legal Developments tracks the key dates in the implementation of the above changes.
Our earlier article for more on the Companies (Miscellaneous Reporting) Regulations 2018.