On June 13 2018, the Financial Reporting Council (FRC) issued a draft of the Wates Corporate Governance Principles for Large Private Companies (the Principles), and supplementary guidance, for public consultation. In its August 2017 response to its Green Paper on corporate governance reform, the Government stated that it believed that the corporate governance framework for the UK’s largest private companies should be strengthened and, in January 2018, Sir James Wates was appointed to chair a coalition group tasked with developing appropriate corporate governance principles for large private companies.
The Principles have now been published for consultation and are designed to assist companies which, for financial years beginning on or after January 1, 2019, will be required by the Companies (Miscellaneous Reporting) Regulations 2018 to provide a corporate governance statement for the first time. Such companies may adopt the Principles as a framework for the purposes of making the statement of corporate governance arrangements that will be prescribed by the Regulations, assuming they are adopted in their current form. It is further hoped that the Principles will act as guidance to companies of all sizes, not just those subjected to the new legislative requirements, in understanding good practice in corporate governance and apply that good practice widely.
It is intended that the Principles be applied on an “apply and explain” basis. A company adopting them will be expected to apply them fully but can provide a supporting statement for each of the six Principles that gives an understanding of how the company’s corporate governance processes operate and achieve the desired outcomes. The Principles are supported by non-exhaustive guidance that helps companies apply them in practice but this is not to be seen as a checklist. Rather, companies adopting the Principles will be encouraged to demonstrate, through a written explanation in their directors’ report and on their website, how the application of the Principles has resulted in improved corporate governance outcomes.
The six Principles and accompanying guidance are as follows:
- Principle One - Purpose: An effective board promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.A well-defined purpose will help companies of all sizes and structures to articulate their business model, and develop their strategy, operating practices and approach to risk. In large private companies, key shareholders and the board should work together to ensure the company works with a clear sense of purpose. An effective board will promote and develop its collective vision of the company’s purpose and can identify and explain how events or developments affecting the company’s long-term success have been addressed. The board is responsible for ensuring that its strategy is clearly articulated and implemented throughout the organisation and that it, with the company’s values, supports appropriate behaviours and practices within the organisation. Key shareholders, the board and management must own and maintain a commitment to embedding the company’s desired culture throughout the organisation.
- Principle Two - 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 the board should be guided by the scale and complexity of the company.An effective board embraces diversity, promotes accountability and incorporates objective thought that promotes appropriate constructive challenge and effective decision-making. Directors should collectively demonstrate a high level of competence relevant to the company’s business needs and stakeholders, companies should commit to ongoing board professional development and directors should be individually evaluated. Board membership must be broad enough to provide for an appropriate degree of challenge and analysis but agile enough to enable efficient and effective decision making.
- Principle Three - Responsibilities: A board should have a clear understanding of its accountability and terms of reference. Its policies and procedures should support effective decision-making and independent challenge.Constitutional documents should set out policies and procedures that govern the internal affairs of the company including matters relating to authority, role and conduct of directors. Strong accountable decision-making systems and the delineation of responsibilities ensure the company’s key shareholders, board and senior management have clearly defined roles and decision-making powers, with conflicts of interest appropriately managed. Advisory or board committees could be established with clear terms of reference and independent challenge in board decision-making should be part of effective corporate governance practices. A board should have confidence in the integrity of information used for decision-making and reported by a company. The company should establish internal processes to ensure effective operation of systems and controls and that the quality and integrity of information is reliable, enabling directors to monitor and challenge the performance of the company.
- Principle Four - Opportunity and risk: A board should promote the long-term success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks.A board has responsibility for an organisation’s overall approach to strategic decision-making and risk management, requiring oversight of risk and how it is managed and appropriate accountability to stakeholders, particularly with regard to conflicts of interest.
- Principle Five - Remuneration: A board should promote executive remuneration structures aligned to the sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.Director and senior management remuneration should be developed around principles that align with the company’s culture, values and long-term success including a considered assessment of the company’s response to matters such as its gender pay gap reporting. A clear policy on the transparency of remuneration structures should be established to enable effective accountability to key shareholders. Remuneration including benefits, for directors and senior management, should consider the broader operating context of the company, including the wider workforce’s pay and conditions.
- Principle Six - Stakeholders: A board has a responsibility to oversee meaningful engagement with material stakeholders, including the workforce, and have regard to that discussion when taking decisions. The board has a responsibility to foster good stakeholder relationships based on the company’s purpose.The board should present a fair, balanced and understandable assessment of the company’s position and prospects and make this available to its material stakeholders on an annual basis. Companies should identify the stakeholder relationships that are integral to its ability to generate and preserve value. The board should demonstrate how the company has undertaken effective engagement with material stakeholders and how such relationships have been taken into account in its decision making. Since the largest material stakeholder may be the workforce, companies should develop methods to engage meaningfully with their workforce and use such forms of engagement when taking decisions.Responses to the consultation are to be received by September 7, 2018 to allow for the final Principles and guidance to be published in December 2018.
(FRC, Consulation paper: The Wates Corporate Governance Principles for Large Private Companies, 13.06.18)