Wates Corporate Governance Principles

29th August 2018

From January 2019 new regulations (the Companies (Miscellaneous Reporting) Regulations 2018) will require private companies of a significant size to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow a formal code such as the Wates Corporate Governance Principles.

Following recent and widely publicised corporate failures, which have affected the jobs and pensions of thousands of workers, the Government is keen to restore public confidence in British business.

Private limited companies are the most common corporate structure in the UK but are not subject to the same reporting requirements and accountability as public companies, nor do they currently follow a formal corporate governance code. But this is now set to change.

How have these Principles been developed?

The Principles have been developed by a coalition of organisations chaired by James Wates, head of family-owned construction company Wates Group. Mr Wates places the emphasis on ensuring the long term success of a business through transparency, good business ethics and accountability.

Who will it apply to and when will it apply?

The Wates Principles will apply to private companies with either:

(i) more than 2,000 employees; or

(ii) turnover above 200 million pounds ($267 million) and a balance sheet of more than 2 billion pounds.

Where companies meet these criteria they must publish a statement of their corporate governance arrangements in their directors' report. This includes subsidiaries of listed companies and subsidiaries of parent companies that prepare a consolidated directors' report. In circumstances where a subsidiary (but not the parent) meets the criteria, and the parent prepares consolidated group accounts, the parent company would not have to publish a corporate governance statement in the group directors' report.

The public consultation of the draft Principles and guidance will close on 7 September 2018 and can be found here. The final Principles and guidance are expected to be published in December 2018 and will apply to companies with a reporting period starting on or after 1 January 2019.

Where companies meet the Wates Priniciples criteria they must publish a statement of their corporate governance arrangements in their directors' report.

The draft 6 Principles are as follows:

Principle

Explanation

Comparison with UK Corporate Governance Code 2018

Purpose

An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.

Similar to Section 1 of the Code, the Principle stresses the importance of developing a purpose in partnership with shareholders and key stakeholders and using this to guide decision making.

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.

Whereas the Code focuses on effective succession planning of the board, the Principle focuses on the size of the board. However, both the Code and Principle asserts the importance of having a diverse board.

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.

Section 2 of the Code explicitly states that NEDs should comprise a majority of the board. In comparison, the Principle recommends the company consider the value of independent representatives on the board.

Opportunity and Risk

A board should promote the long-term success of the company by identifying opportunities to create and preserve value and establish oversight for the identification and mitigation of risk.

The Code is more onerous in requiring the board to establish an audit committee; whereas the Principle gives private companies the freedom to choose how they approach risk management.

Remuneration

A board should promote executive remuneration structures aligned to sustainable long-term success of a company, taking into account pay and conditions elsewhere in the company.

The Code states that there should be “formal and transparent” procedure around executive remuneration and no director should be involved in setting their own pay. Whereas the Principle sets no such requirement.

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 relationships based on the company’s purpose.

Both the Code and Principle place equal importance on participation and input of the workforce in the boardroom. The Code prescribes 3 methods for ensuring workforce engagement which are absent from the Principle.

How will it be applied?

The Principles will follow the same “comply or explain” basis as the UK Corporate Governance Code. The Companies (Miscellaneous Reporting) Regulations 2018 will require certain private companies (who meet the criteria above) to disclose their corporate governance arrangements in their directors’ report and on their website, including whether they follow a formal code.

For more information please contact Abbie Robinson.

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