“THE WATES CORPORATE GOVERNANCE PRINCIPLES PROVIDE A TOOL TO HELP LARGE PRIVATE COMPANIES LOOK THEMSELVES IN THE MIRROR, TO SEE WHERE THEY HAVE DONE WELL, AND WHERE THEY CAN RAISE THEIR CORPORATE GOVERNANCE STANDARDS TO A HIGHER LEVEL.” – JAMES WATES CBE, CHAIRMAN, WATES GROUP
Several high profile collapses (such as BHS and Carillion) have highlighted corporate governance issues in UK businesses.
New regulations require directors of larger companies to provide more information in their annual reports about the way in which their company is run.
This blog looks at one such requirement: the disclosure of corporate governance arrangements by the largest companies. It considers how the Wates Corporate Governance Principles, designed to help these companies, can be of use to companies of all sizes. Smaller companies can apply the principles in the way that best fits their company; no matter what size your company is, or what it does, the Wates Principles contain useful pointers for developing effective governance practices, which will in turn increase public trust in UK companies and thereby hopefully increasing investment in the UK economy as a whole.
What are the requirements?
Companies in scope (see below) are required to disclose which, if any, corporate governance code they used during a financial year and give detail of how the code was applied.
The requirement applies to company reporting on financial years starting on or after 1 January 2019.
Which companies are in scope?
All UK companies which meet either of the criteria below (if they are not currently required to provide a governance statement):
- more than 2,000 global employees; or
- a turnover of more than £200 million globally and balance sheet of more than £2 billion.
What are the Wates Principles for?
The Wates Corporate Governance Principles have been designed as a corporate governance code that companies in scope can follow if they wish.
They are a collection of six high level guiding principles of corporate governance, supported by practical guidance.
Outline of the Wates Principles
“An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.”
All directors should promote the success of the company. The Wates Principles provide that boards should have a clear understanding of the views of shareholders including those with a minority interest. Directors should act with integrity and lead by example, setting the tone from the top, building positive relationships with all stakeholders, particularly the workforce.
2 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 Wates Principles provide that an effective board has an appropriate combination of skills, backgrounds, experience and knowledge that promotes accountability and incorporates objective thought, which in turn provides constructive challenge to achieve effective decision-making.
3 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.”
Clear corporate governance policies, practices and company leadership, all working together, promote effective stewardship to deliver long-term value.
The Wates Principles provide that a company should set out policies and practices that govern the internal affairs of the company. These include matters relating to the authority, accountability, role and conduct of directors, processes for dealing with conflicts of interest, and may include specific information relating to shareholders, such as shareholder agreements and protection of minority shareholders.
4 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.”
This should include processes for the identification of future opportunities for innovation and entrepreneurship. Such opportunities may often be dependent on an agreed risk appetite and the company’s long-term strategy and prospects. It may also include processes for ensuring that new business opportunities of a certain value are considered and approved at board level.
“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.”
The Wates Principles provide that the board should establish clear policies on remuneration structures and practices which should enable effective accountability to shareholders. This should take account of the broader operating context, including the pay and conditions of the wider workforce and the company’s response to matters such as any gender pay gap.
6 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.”
Stakeholders include the workforce, customers and suppliers, but also other material stakeholders specific to company circumstances or sectors, such as regulators, Governments, pensioners, creditors and community groups. The Wates Principles provide that the board should present to stakeholders a fair, balanced and understandable assessment of the company’s position and prospects and make this available on an annual basis and Boards should ensure that there are channels to receive appropriate feedback from discussions with stakeholders. When explaining impact on the community or environment, boards may want to refer to recognised international standards or frameworks that it follows.
How can the Wates Principles help other (smaller) companies?
Many companies will not be large enough to be subject to the new corporate governance reporting requirement. However, governance arrangements are something that all companies should be considering, especially if the company is growing or planning to seek investment or funding. If tendering for a contract in the public or private sector, for example, even smaller companies may find that questions are asked about their governance.
Good governance increases shareholder value through:
- facilitating effective, entrepreneurial and prudent management;
- improved risk management (e.g. operational, financial);
- enabling companies to pursue opportunities/investments more confidently and effectively;
- taking into account legitimate interests of stakeholders such as shareholders, creditors, employees, customers, etc ; and
- enhancing and protecting the company’s brand and reputation.
Good corporate governance also helps a business to manage the risks that nowadays can “sink” a company and its directors (financially or reputationally).
As an example, companies may find it useful to have a delegated authority schedule that sets out clearly who in the business has authority to sign certain contracts, make decisions in certain areas and approve expenditure. The schedule may include the delegation of authority to managers of appropriate seniority, while ensuring the board retains authority for particular decisions, significant expenditure or contracts.
How Brodies can help
Brodies’ corporate team is experienced in advising and training clients (small and large) on appropriate corporate governance arrangements for their business. Please contact any member of the corporate team or your usual Brodies contact for further information.
On February 11, 2019