There has been an on-going initiative by the UK government to develop a set of corporate governance principles for large private unlisted companies as part of the package of measures to improve the UK’s corporate governance framework. The development of the Wates Corporate Governance Principles for Large Private Companies (the Wates Principles) is part of such initiative.
As a reminder, the original definition contained in the code produced by the Cadbury Committee in 1992 set out below remains the classic definition:
“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.”
Most private unlisted companies are not technically required to adopt formal corporate governance principles or report on any they may have. However, the Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860) introduced a number of new reporting requirements for financial years beginning on or after 1 January 2019 including a requirement for all companies of a significant size to disclose their corporate governance arrangements in the annual report and on their website.
These companies are also required to state which formal governance code they follow (or provide an explanation as to why they do not follow one).
UK-incorporated companies with either:
are required to disclose their corporate governance arrangements with effect from financial years beginning on or after 1 January 2019.
There are various reasons why private unlisted English companies might want to voluntarily introduce more formal corporate governance principles. These include demonstrating good corporate governance practice to stakeholders and road mapping how they intend achieve the long-term sustainable success of the company. There are a number of options on which to base such principles, including the UK Corporate Governance Code (the Code), the Corporate Governance Code for Small and Mid-Size Quoted Companies produced by the Quoted Companies Alliance, and the Institute of Directors corporate governance principles. The Wates Principles are a further option.
As a reminder, the Wates Principles are intended to be flexible and high level and are not prescriptive. This acknowledges the wide variety of ownership structures among large private companies. Each of the six principles is accompanied by guidance to help a company understand how to apply the principle in a way appropriate tor it. Rather than a “comply or explain” approach adopted in the Code under the UK Listed Rules, an “apply and explain” approach has been taken. This means that companies who adopt the Wates Principles will be expected to report on their governance processes against each principle.
One of the key themes of the recent governance reforms is the introduction of an annual reporting requirement in relation to section 172 of the Companies Act 2006, commonly known as the s172 Director’s Duty. This is the well-known duty to “promote the success of the company for the benefit of its members as a whole”, whilst having regard to various other stakeholder interests.
The purpose of the s172 Director’s Duty is to encourage boards of companies to create a culture whereby decisions are made with greater consideration for the wider impact upon the organisation beyond the traditional emphasis on just financial performance and strategic objectives.
The GC100 group has commented that the s172 Director’s Duty has one overarching theme: culture. With their focus on the importance of culture and broader stakeholder engagement, adherence to the Wates Principles is therefore also likely to assist those companies in meeting their section 172 reporting obligation.
Baker McKenzie recently conducted a survey of 200 general counsels, in-house lawyers and company secretaries (the survey) and found that many companies are still struggling to implement the changes that are necessary to comply with these new corporate governance reforms.
Some of the key findings of the survey were as follows:
The overall response from the survey was that better corporate governance can help prevent the collapse of large private companies, and a large percentage says that good corporate governance is a priority for their board.
There have been a number of larger private limited companies that have already chosen to include in the Annual Report and Accounts an “apply or explain” section in relation to compliance with the Wates Principles including The Wates Group (unsurprisingly as Sir James Wates is their chairman!), and Marshall of Cambridge (Holdings) Limited.
What steps should be taken in practice by larger private listed companies who want to promote a more structured set of corporate governance principles?
If not then adopting new principles based on the Wates Principals may be beneficial as they were developed alongside the CMR Regulations to be used as a user-friendly framework and benchmark for those large privately owned companies that are required to produce a statement of their corporate governance arrangements.
For more information and advice on corporate governance, please contact Caroline Lavis.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.