‘Good business, well done, is a force for good in society.’
James Wates CBE

‘Corporate governance’ and ‘private companies’ haven’t historically been two terms found in the same sentence, due in part to the fact that private companies have been left to their own devices on all things related to governance–that is, until now.

‘But is this needed’? I hear you cry. Well, let’s examine the current landscape…

Private companies account for over 96 percent of all companies in the UK and naturally contribute significantly to our economic and social prosperity. Broadly speaking though, much of their internal practices avoid the level of scrutiny that a company trading on the London Stock Exchange would be subject to under the UK Corporate Governance Code.

Why Are the Wates Principles Needed Now?

The collapse of the large, privately owned retailer BHS in 2016 and the loss of 11,000 jobs drew public attention to the need for greater transparency and accountability for private companies. In an age of social media where bad news spreads like wildfire, it can no longer be accepted that a business can operate ‘under the radar’.

The financial landscape is also changing. Historically, these larger private companies would look towards a stock market listing as an expected step in their evolution. However, buoyant venture capital funding, together with a potential pre-BREXIT ‘wait-and-see approach’, is keeping companies private longer. Gone is the dependency on capital markets for equity, and as companies stay private longer, they are more likely to become a prestigious ‘unicorn’ company.

In order to recognise these developments and to restore trust between business and the wider community, James Wates CBE and the FRC were tasked with designing a corporate governance framework for large private companies to follow, ultimately known as The Wates Principles.

What are The Wates Principles?

The Wates Principles are a framework designed for private companies to adopt and adjust based on the size and complexity of their company. Overall, the principles seek to align the long-term preservation of the company’s value and strategy with stakeholders through consistent and open communication, policies to promote accountability and transparency and engagement between leadership and stakeholders.

Wates outlined six principles, using a pyramid hierarchy with the first principle at the top, the second and third supporting the middle and the last three building the foundation.

Wates labelled the top of his pyramid ‘the north star’, his middle section ‘characteristics of governance’ and the bottom as ‘specific matters’. This structure guides companies through the principles and helps them understand how they work together to build an approach private companies can follow.

'The North Star’

1. Purpose and Leadership
In order for the Wates Principles to work, a company must first establish its purpose and communicate that purpose throughout the organisation. The purpose lends itself to creating a strong culture and a shared vision among all stakeholders, including the workforce.

Once a purpose has been defined, Wates suggests that your leadership, at every level, should use the purpose to promote company success and culture, and your board should develop a strategy that creates lasting value and fulfils the company purpose. Transparent communication is key to the successful implementation of this principle.

'Characteristics of Governance’

2. Board Composition
When composing your board, Wates advises companies to strategically employ both diversity and balance to create effective decision-making and regulate power and responsibilities.

The principles counsel companies to set the size and structure of their board in relation to the complexity of their company and consider appointing board members outside of the executive team to foster succession and professional development.

3. Director Responsibilities
Setting expectations and responsibilities among board members is crucial to defining company policy and maintaining efficient decision-making processes. The principles state that company policies can include anything from accountability and internal conduct standards to shareholder agreements and protections.

The principles recommend using internal processes to establish performance and accurate information, ensuring the effective operation of the company.

'Specific Matters’

4. Opportunity And Risk
How does your company generate value long into the future? The fourth principle provides guidance on how to promote sustainable success and continued innovation. It also discusses how companies manage their risk, including risk to their reputation.

Wates says the board should pursue risk mitigation using defined accountability frameworks, while the board’s strategy should plan for future value-building opportunities and value-preserving efforts.

5. Remuneration
By aligning executive remuneration with the long-term success of the company and the overall compensation outside of the executive team, Wates shows that companies can create a shared agenda among stakeholders.

This principle also employs the use of committees to set pay structures and advises companies to consider damage to reputation as a result of ‘excessive rewards.’

6. Stakeholder Relationships and Engagement
Wates places responsibility for stakeholder relations with the board and advises that private companies take into consideration their operating environment, striving to create long-term value.

Communication is a major theme throughout all the principles but particularly concerning the sixth principle as communication with stakeholders tracks toward effective strategy and improvement of company policy. Wates advises that companies deploy various communication methods to encourage a ‘two-way dialogue’ with the workforce and leadership.

Adopting the Wates Principles

The principles recognise that there are a variety of large private companies in the UK, with differing management and ownership structures meaning a ‘one-size-fits-all’ approach is not appropriate.

Many of these businesses have thrived from their agile working practises; therefore, preserving that agility is an important element which has also been considered in the development of these guidelines.

As Wates points out, ‘We have kept them (Wates principles) flexible and high-level, with guidance provided not as requirements, but to help companies understand how they can apply the principles. After all, good corporate governance is not about box-ticking’.

Corporate governance should not be perceived as a box-ticking exercise but a means of earning the trust and confidence of all stakeholders including customers, suppliers, employees and the wider community. Arguably, by using the principles, companies can gain a competitive advantage–after all, everyone wants to be associated with a business that is well managed.

I have no doubt that large private companies will embrace this new voluntary framework and that the implementation of a common set of corporate governance principles will help produce a positive impact on UK business.

If you’d like to learn more about how Solium supports UK private companies, feel free to drop me a line.

The Wates Corporate Governance Principles for Large Private Companies. (PDF)