Wates principles: Good governance is a competitive advantage

Posted in Reporting on 19 December 2018 By Henry Ker, Stakeholder Communications Lead

The new Wates Corporate Governance Principles for Large Private Companies are based on the belief that governance is a force that can bring benefit to companies and society alike.

"I feel passionately that good business, well done, is a force for good in society," James Wates of the Wates Group told the audience at the launch event for the new Wates Corporate Governance Principles for Large Private Companies.

However, he went on to add that "there has been a fall in trust in business and other large organisations. We have to start raising standards ourselves. If we don’t, the government will introduce even more legislation. And that wouldn’t be in our interests."

Part of the countermeasure to this are the Wates Principles. Produced in conjunction by the FRC and a coalition group of professional industry organisations, they are the result of a project launched after the collapse of high-street retailer BHS and the government’s green paper on corporate governance in 2016.

From that, the government introduced new legislation earlier this year to require private companies of a certain size to report on their corporate governance, explaining their adherence to a code or other arrangements. As Wates explained: "There is a gap with large private companies falling outside the regulatory framework and the government committed to levelling that playing field."

A supporting framework

The Wates Principles have been designed as a code that will be relevant for the diverse range of large private businesses caught by the new reporting thresholds. The six principles themselves are:

1. Purpose and Leadership
2. Board Composition
3. Board Responsibilities
4. Opportunity and Risk
5. Remuneration
6. Stakeholder Relationships and Engagement

Each principle is accompanied by supporting guidance and explanation to help companies report, and work on an ‘apply and explain’ basis, in contrast to the UK Corporate Governance Code which utilises ‘comply or explain’ for its provisions (although the code’s principles do operate on an apply or explain format).

I spoke to James Wates after the event and he explained: "The primary message is: this is not complicated. The principles are a good framework to be able to look at what you, as a business, do well, look at what you can do better, and then use it as a means of promoting yourself as a well-run business."

Building value

This was a theme which ran throughout the launch event. At various points, Wates described using the principles during board meetings as a mechanism to ask "what have we done today to make our business better", and later as a "sales pitch for the business" – to say “this is us, this is why you should do business with us”.

Tim Farazmand, chair of Palatine Impact (a private equity impact fund, investing in companies that have a social or environmental impact) and part of the launch event’s discussion panel, was similarly vocal in his support of the principles, saying: "Good corporate governance can be a source of competitive advantage and a real chance to build value in the business."

"The private equity industry will embrace the Wates Principles. Strong corporate governance has always been at the heart of what private equity does, particularly in terms of the companies that private equity back,’ he said. He went on to add that in the area of impact investing ‘these principles will undoubtedly resonate with the businesses that we back in those funds. Although these companies are minnows compared with those that have to comply with the new legislation, I am going to make it my personal challenge for 2019/2020 to get those companies to look to actively adopt the Wates Principles."

Corporate governance as a source of competitive advantage is not necessarily a perspective always taken by companies – all too often, and especially given the volume of regulatory requirements levelled on them, governance reporting can feel like a compliance exercise that has to be done, rather than something which can add value.

But the message from those speaking at the event is clear: good corporate governance, and the Wates principles as a part of that, benefits an organisation. Good governance is an internal driver of positive change; a source of competitive advantage; a protection against further regulatory intervention by government; and, most of all, a force to ensure that business delivers for society. Businesses would be wise to take advantage of it.

Identify, embed, report

The next steps for companies will be to consider their existing governance practices. Following that, to determine whether or not they plan to follow a corporate governance code, and if so which one – the Wates Principles have been specifically designed for the private sector, but they may not be the best option for every company. A large number of organisations caught by the reporting thresholds will be subsidiaries of listed entities, so reporting against the UK Corporate Governance Code (as their parent company does) may make sense. If a company does not intend to follow a recognised code, but plans to do governance its own way, it needs to be prepared to explain this approach and why it works best for it.

Once these decisions have been made, companies should look at identifying which policies and procedures may need revising or introducing and then work to have them embedded so that they can be reported on the following year. This is something that will require a cross-organisational effort, bringing in company secretarial, governance and comms departments, as well as executive and board involvement, to ensure a unified approach. An external agency such as Emperor may be able to add particular value here.

The gauntlet has been laid down and the onus is now on the company. Coupled with the new section 172(1) reporting on how directors have considered stakeholders while fulfilling their duties to the company, the private sector has never had to report on such scale before. And although much of the sector is already utilising good governance – they just need to be more transparent and tell stakeholders about the work they are doing – some companies will need to up their standards or risk the consequences.

 

If you have any questions about the new corporate governance requirements for large private companies, or are interested in advise and support for reporting, get in touch with Henry Ker, Stakeholder Communications Lead on [email protected].

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