An inaugural review of adoption of the Wates Principles of Corporate Governance by the Financial Reporting Council (FRC), three years since they were published, has found that they are the most widely adopted corporate governance code used by large private companies, but their application remains a work in progress.
The analysis, conducted by the FRC with the University of Essex, found that companies have been providing good levels of disclosure in terms of general information about their formal policies. However, they provided relatively lower levels of disclosure when it came to how these policies are applied in practice.
The Wates Principles, developed by a coalition group chaired by Sir James Wates CBE and guided by the FRC, launched in December 2018 to provide a framework to help companies adopt a set of key behaviours to secure trust and confidence among stakeholders.
Wates says the research provided the timely and rigorous analysis needed to inform public policy decisions about corporate governance. “The research shows companies are grasping the spirit of the Wates Principles, and I would expect them to use this report to guide continual improvements in their reporting.
“Overall, there’s room for improvement in reporting, and we hope that some of the points raised in this report will help companies, even those not subject to the regulations, demonstrate good practice and make improvements going forward,” Wates says.
“Many companies are clearly seeking to not just tick boxes, but to communicate to their stakeholders relevant information about how they’re governed, with an appropriate level of detail, using clear and understandable language,” he adds.
Companies tended to disclose more information about how their corporate governance practices and policies have matured over the years. “This could indicate that companies are still in a learning phase and that they might be developing their disclosure practices as their corporate governance arrangements evolve,” the FRC report says. For instance, the development of new structures and processes relating to purpose and leadership might require more time.
Two-thirds of companies within the scope of the regulations reported on corporate governance either within their directors’ report or elsewhere in their annual report. Of these, 57% relied on a corporate governance code to define their arrangements and 35% stated that they relied on alternative corporate governance arrangements. However, the study found that 8% failed to report meaningfully on their corporate governance arrangements.
The analysis also found that some companies choose to refer to more than one code: 10 companies referred to two codes, and one referred to three. Of those companies that did not apply a recognised corporate governance code, very few provided a rationale for non-application.
Sir Jon Thompson, FRC CEO, says: “We’re pleased to see many private companies using the Wates Principles to communicate to their stakeholders relevant information about how they’re governed, with an appropriate level of detail, using clear and understandable language. This is a positive first result. We hope that companies will build on this good start and continue to improve in practice and reporting in the future.”
Peter van Veen, ICAEW’s Head of Corporate Governance, says: “The FRC’s in-depth assessment has shown a very good level of uptake of the Wates Principles by large private companies. It’s especially encouraging that companies are seeing yearly governance reporting as a benefit and not a burden.”
The Companies (Miscellaneous Reporting) Regulations 2018 require UK-registered large private companies, and others that meet the threshold but are not required to adopt a specific corporate governance code, to publish a statement setting out their corporate governance arrangements. The requirements apply to companies that satisfy either, or both, of the following conditions: more than 2,000 employees, and a turnover of more than £200m and a balance sheet of more than £2bn.
Wates Principles at a glance
Principle One – Purpose and Leadership
The purpose of the company and how this is developed and promoted by the board. Also the role of the board in ensuring that the company’s values, strategy and culture are aligned with its purpose.
Principle Two – Board Composition
The effectiveness of the board, the role of the chair and the importance of diversity within the board in terms of skills, backgrounds, experience and knowledge.
Principle Three – Director Responsibilities
The board and individual directors’ understanding of their responsibilities and accountability. The policies and procedures in place to support effective decision-making and independent challenge.
Principle Four – Opportunity and Risk
How the board should ensure the long-term sustainable success of the company by identifying opportunities and risks.
Principle Five – Remuneration
The executive remuneration policy and its alignment with the company’s long-term sustainable success.
Principle Six – Stakeholder Relationships and Engagement
The importance of stakeholder engagement and the role of the board in fostering such relationships, particularly the relationship between the board and the workforce.