On December 10, 2018 the Financial Reporting Council (FRC) published the final version of the Wates Corporate Governance Principles for Large Private Companies (Wates Principles). A draft of the Wates Principles was published for consultation in June 2018 in light of the requirement in The Companies (Miscellaneous Reporting) Regulations 2018 (Regulations), for financial years commencing on or after January 1, 2019, for all companies of a significant size, that are not currently required to provide a corporate governance statement, to include such a statement in their directors’ report. The Wates Principles are designed to help such companies comply with the Regulations.
The Wates Principles were developed by a coalition established by the FRC and chaired by James Wates CBE. Companies will be able to adopt them as an appropriate framework when making a disclosure about their corporate governance arrangements under the Regulations, following an “apply and explain” approach. Boards are encouraged to apply each Principle by considering them individually within the context of the company’s specific circumstances and then explain, in their own words, how they have addressed them in their governance practices.
The six Principles are:
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. The guidance states that directors should act with integrity and set the tone from the top and it now includes suggestions on how to monitor culture.
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. The guidance suggests companies should consider separating the roles of chair and chief executive and it promotes the benefits of non-executive directors, as well as recommending that boards have a diversity and inclusion policy.
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. The guidance now promotes a periodic review of governance policies and practices to ensure they remain fit for purpose.
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. The guidance is now split into sections on risk, opportunities and responsibilities and it deals with emerging risk and principal 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. The guidance suggests remuneration should be linked to company strategy, it suggests considering increased transparency in relation to remuneration policies and the possible use of a remuneration committee.
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. The guidance refers to the FRC’s Guidance on the Strategic Report which refers to methods of engagement with the workforce and it points out different groups that may be stakeholders in certain circumstances.
The Introduction to the Wates Principles has been revised in light of feedback received in the consultation process. For example, more information is provided about the “apply and explain” approach, and it is made clear that groups should consider how they report on the governance of subsidiary companies to enable cross-referral. While reporting against the Wates Principles will only be applied to annual reports published from January 2020, the coalition group and the FRC plan to adjust them as needed in the future.
(FRC: The Wates Corporate Governance Principles for Large Private Companies, 10.12.18)
(FRC: The Wages Corporate Governance Principles for Large Private Companies - Consultation feedback paper, 10.12.18)