The Financial Reporting Council (FRC) has released its first insights report on Wates Governance Principles for large private companies. Despite the limited scope of the review, the findings within the report can be applied to any company that follows the Wates Principles. 

The advice in the report is based on feedback from stakeholder groups, who reviewed and provided their thoughts on a sample of disclosures. There are six Wates Principles:

• Purpose and leadership
• Board composition
• Directors responsibilities
• Risk and opportunities
• Remuneration
• Stakeholder relations and engagement.

“Since bringing the Wates Principles in-house at the FRC, we've engaged with both companies and users of governance reports to understand how we can better support meaningful disclosures,” said Mark Babington, the FRC’s Executive Director of Regulatory Standards. “This review reflects that feedback, providing practical examples and clear guidance to help private companies tell their governance story more effectively. The flexibility of the 'Apply and Explain' approach remains the framework's greatest strength, and we want to help companies use it to build stakeholder trust through clearer, more outcome-focused reporting.”

Here is some practical guidance on how to implement the critical takeaways from the review:

Purpose and leadership: consider strategy, purpose, culture and values

Reporting of principle one – purpose and leadership – has been found by FRC to be generally quite weak, with organisations focusing on generic statements. Instead, companies should articulate how the Wates Principles are applied to the organisation’s strategy, purpose, culture and values. The statement should outline the who, what, why, where and when of the company’s strategy, including:

• who sets the strategy; 
• the short-term and long-term targets;
• how much it is reviewed; and 
• how it is implemented and communicated. 

Board composition: add more detail

Stakeholders want more detail on Board composition, according to the FRC report. Preparers are encouraged to avoid ‘boilerplate’ reporting and be more specific and detailed. For example, companies that are part of a group often do not include any information about their parent or subsidiary companies. Disclosures should include specific information about the Chair and their role and responsibilities. The disclosure should demonstrate the balance and diversity of skills on the Board, and how any imbalances will be addressed. Likewise, the report should disclose whether the Board has any non-executive directors (NED), and if not, when and how they plan to recruit some, and how they achieve effective challenge without any NEDs present. A Board review should include:

• decision-making processes; 
• board committee effectiveness;
• how the board works together; 
• the skills and experience mix;
• succession plans; and 
• engagement with stakeholders.

Directors responsibilities: outline committee roles

To be completely transparent about director accountability, the report should include details on each Board committee, including purpose, roles and responsibilities, and background on the committee members. 

Risk and opportunities: think short and long term

While stakeholders largely found reporting in this area to be useful, there are some things for preparers to keep in mind. Companies can cross-reference the strategic report to cover off risks. When it comes to opportunities, companies have some leeway over how much they want to report, considering that some information might be commercially sensitive. However, it should give some indication of how the company creates and keeps its value over the short and long term. For example, how the company identifies opportunities, and who is responsible for considering those opportunities.

Remuneration: transparency is critical

Stakeholders have reported that executive remuneration reporting is poor and not particularly useful. They want to see the reasoning behind director pay and how it ties into company performance. The FRC’s report includes an example from Manchester Airport; the company provides details of its short- and long-term incentive plans, including the percentages tied to financial performance versus other strategic objectives. It explains what determines the outcomes for both incentive plans. The FRC offers the following pointers on what reports should include:

• details of the remuneration committee and how they set pay levels;
• the decisions that the committee has made across the year;
• how director pay is affected by how well the company meets its strategic goals;
• considerations around gender and ethnicity pay gaps; and
• the role of any parent company or subsidiaries, if applicable. 

Stakeholder relations: cross-reference Section 172 (if applicable)

Again, reporting is generally strong in this area, but the FRC recommends that companies that also provide a Section 172 statement can cross-reference between the two disclosures, which will avoid any duplication and increase transparency. This shouldn’t be a generic statement, but rather a series of explicit references to the relevant parts of the statement, with specific Board decisions made during the reporting year.  

“It is encouraging to see large private companies and subsidiaries of oversees listed companies continuing to report again the Wates Principles,” said Peter Van Veen, ICAEW’s Director, Corporate Governance and Stewardship. “As stakeholders value these reports, we encourage private companies to consider reporting against these principles, or the UK Corporate Governance Code, if they do not do so already.”