Corporate governance - the Wates principles for large private companies explained
The Wates Principles on corporate governance were launched in December 2018. They apply to company reporting for financial years starting on or after 1 January 2019. The principles apply on a voluntary ‘apply and explain’ basis to large private companies. This means that boards should apply each principle by considering it individually within the context of the company’s individual circumstances.
The Principles complement the Companies (Miscellaneous Reporting) Regulations 2018 which were introduced in June (to apply from 1 January 2019) which require all companies of a significant size (companies with more than 2,000 employees or a turnover of more than £200 million and a balance sheet of more than £2bn) that are not currently required to provide a corporate governance statement to disclose their corporate governance arrangements. Companies should also have regard to the 2018 Regulations where these apply to them.
Unlike the corporate governance code which sets out additional provisions which must be complied with the Wates Principles offer guidance under each principle. This guidance does not need to be reported on.
Companies should also provide a supporting statement that provides an understanding of how their corporate governance policies and processes work to achieve the desired outcome.
The six principles are:
- purpose and leadership
- board composition
- director responsibilities
- opportunity and risk
- shareholder relationships and engagement
The Principles explained
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’
Guidance - boards should understand the views of shareholders; operate with a clear sense of purpose; purpose and values should inform expected behaviours and practices throughout the organisation including employment practices
‘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’.
Guidance - appointments to the board should promote diversity in line with the Equality Act protected characteristics. A policy on diversity and inclusion aligned to company strategy can support board appointments and should support government initiatives.
‘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’.
Guidance - there should be clear corporate governance policies, practices and company leadership. A company should set out policies and practices that govern the internal affairs of the company.
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’
Guidance - the board should establish clear policies on remuneration structures and practices which should enable effective accountability to shareholders. This should include taking into account the pay and conditions of the wider workforce and the company’s response to matters to such as any gender pay gap. (See also Reg 17 of the 2018 Regulations which applies to quoted companies with more than 250 UK group employees requiring such companies to publish ratio of total CEO pay to median UK employee’s pay and to 25th and 75th percentile of employee’s pay, and explain the ratios and put them into context).
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 decision.
Guidance - dialogue with stakeholders (including the workforce, customers and suppliers, regulators, government, pensioners, creditors and community groups) help boards understand the effects of company policies and practices and re-align strategy.
Boards should ensure that there are channels to receive appropriate feedback from discussions with stakeholders.
Companies should develop a range of formal and informal channels that enable them to engage in meaningful two-way dialogue with their workforce, enabling the workforce to share ideas and concerns with senior management. This might include engagement with unions, focus or consultative groups.
Workforce policies and practices should be aligned with the company’s purpose and values. Such policies should establish clear procedures for raising concerns (eg speak up and whistleblowing procedures) which should be reviewed regularly to ensure effectiveness.
See also Regulation 13 of the 2018 Regulations which applies to companies with a turnover of more than £36m and more than 250 employees. Such companies must include in the directors reports statements summarising
- the company’s action to provide employees with information of concern to them, consult employees or their representatives on a regular basis, encourage employees’ involvement in the company’s performance and a summary of how directors have engaged with employees and had regard to employee interests
-how the directors have had regard to the need to foster the company’s relationships with suppliers customers and others in a business relationship with the company.