The Wates Principles are here – now we wait and see

I had the pleasure on Wednesday of attending the launch event for the new Wates Principles of corporate governance for large private companies, hosted by the Financial Reporting Council.

The Principles were published on Monday and provide a framework for very large private companies to comply with their new obligation, for financial years beginning in 2019, to provide details of their corporate governance arrangements.

The mood at County Hall was positive, with support for the new Principles strong. There is a recognition, to quote James Wates CBE, namesake of the Principles and Chair of the Coalition Group that created them, that “good business, well done, is good for society”.

To begin with, the new reporting requirement will apply to around 1,700 companies, more than double the number that report against the UK Corporate Governance Code. But, in response to a comment that this is a relatively small number, the word from the Department of Business, etc. was that this is a“starting point” that will deliver a “good body of data”, and they are “open to recommendations” on how the regime might be adapted in the future…

Above all, it was evident that there are three cross-sections of companies for whom the Principles will be particularly relevant.

Delegates from the PE industry felt the Principles will provide a sound basis for private equity portfolio companies to build on existing reporting under the Walker Guidelines. According to Tim Farazmand, chair of Palatine PE’s Impact Fund, portfolio companies that can demonstrate good corporate governance are likely to gain a “competitive advantage”. Another attendee expected portfolio companies across all sectors, including smaller ones, to adopt the Principles in time.

Family businesses may seem like an unlikely beneficiary of the Principles, but the Institute for Family Business has firmly endorsed them. The idea is that these companies, which IFB Research Foundation chair Sir Michael Bibby describes as a “force for good”, will be able to use the Principles to explain and demonstrate the beneficial role they play in society.

The elephant in the room, though, was publicly traded businesses. Companies on the Main Market won’t be subject to the new regime – they already report on their corporate governance arrangements under the FCA’s Transparency Rules and by and large adopt the FRC’s UK Corporate Governance Code.

But large subsidiaries of publicly traded companies will be caught. The FRC believes these companies make up more than half of the 1,700 companies that will be reporting from 2020. The expectation is that these subsidiaries will not simply tack onto their parents’ adoption of the UK Corporate Governance Code, but instead adopt their own code to take account of their individual circumstances. Indeed, one delegate I spoke to said that this is precisely the approach the approximately seven large subsidiaries in her company’s group were likely to take.

The FRC hopes that this, along with the new requirement for companies to report on how their directors have promoted their success, will cause large subsidiaries of publicly traded companies to give more thought to how their directors discharge their statutory duties.

There was also an acknowledgement that the new Principles may not be suitable for all companies. James reminded us that the Principles are not intended to be a straitjacket. Companies do not have to choose them as their corporate governance code. “Private businesses are inherently entrepreneurial,” he noted, “and we must not stifle that”. Those that don’t adopt the Wates Principles will have the opportunity to explain why the alternative arrangements they have put in place are suitable.

So what next? We heard a mission statement. James anticipates a review of the Principles in five or six years’ time and hopes there will be on-going monitoring of compliance in the meantime. The FRC is hoping to play a substantial part in the latter task, proposing a “name and fame”, rather than a “name and shame”, approach. FRC chair Sir Win Bischoff was even bolder: he expects the Principles to solidify into a fully-formed “code” in less time than it took the Cadbury Report to formalise as the UK Corporate Governance Code.

Large companies will not need to start reporting under the new requirement until 2020, and so for now we must wait and see. But what was apparent to me tonight is that many regard this as the start of the journey for private businesses, and not the arrival.