The Wates governance principles
This blog past was written by Mark Wearden, an experienced NED, a nationally recognised authority on corporate governance, a prolific author, and an outstanding trainer and mentor.
In 2016, the Department of Business Energy and Industrial Strategy (BEIS) commenced a process of enhancing governance expectation within the private corporate sector. Prior to this, the only official required formulation of governance applied to companies with shares listed on the London Stock Exchange, who are required to follow the expectations of the UK Corporate Governance Code.
James Wates led a Commission on behalf of BEIS which resulted in the release of a set of six governance principles (for large private companies) with the following release statement:
“I believe that good business, well done, is a force for good in society.
The Wates Corporate Governance Principles are a tool for large private companies that helps them look at themselves in the mirror, to see where they’ve done well, and where they can raise their corporate governance standards to a higher level.
Good corporate governance is not about box-ticking It can only be achieved if companies think seriously about why they exist and how they deliver on their purpose then explain – in their own words – how they go about implementing the principles. That’s the sort of transparency that can build the trust of stakeholders and the general public.”
I am often asked what is really meant by good or effective corporate governance and my answer is consistent:
“a governance structure for an organisation which is appropriate for it, at that moment in its evolution and for its foreseeable future, within the expectations and parameters of its stakeholders”
This implies that governance is not, and can never be, something where “one size fits all”, so the search for good or effective governance is an evolutionary and largely individual journey.
The Wates principles were issued for large private companies, but I would argue that their generic nature acts as a useful challenge to directors and stakeholders of all companies of all sizes. They are designed to encourage directors to think about how and why the way in which they govern their business is relevant to their differing stakeholders.
The Wates Principles
Principle 1: Purpose and Leadership
An effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
To be effective in its governance, a board of directors needs to understand what it is trying to achieve, and therefore the purpose of the organisation that it is governing. There is the need for a collective vision.
That purpose and vision needs to be closely aligned with the values and culture of the organisation and therefore be reflected in the way that people behave. The culture needs to be embedded in the organisation under the guidance of the directors.
Principle 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 structure of a board of directors is intrinsic to effective governance.
The guidance suggests that “the board should collectively demonstrate a high level of understanding relevant to the company’s business needs and stakeholder interests”. Remember that each director is individually accountable under Companies Act 2006.
Not all private companies will use independent non-executive directors, but boards are encouraged to consider the value and objectivity that such people might bring to the boardroom.
Principle 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.
It is important for a company to have agreed policies and practices that govern the internal affairs of the company, so that directors (and stakeholders where appropriate) have a clear view of how the business is intended to work.
Directors need to have confidence in the integrity of the information that they receive, and in the robustness of the internal control processes. This information should contain but not be restricted to:
- Financial reporting; Key performance indicators; Workforce data; Environmental data; Customer and supplier awareness
Principle 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.
It is important for directors to consider how the company will create and preserve value over a long period of time, and to determine what period of time is appropriate for such consideration. The longer-term view of sustainability needs to align with the shorter-term concept of ‘going concern’.
Principle 5: Remuneration
A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
Given the ever-present media and public comment around executive remuneration it is highly important that a company should have a clear policy on the transparency of remuneration structures and any aligned accountability to shareholders and/or stakeholders.
Principle 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.
The final principle recognises the importance assigned to a board of directors maintaining a meaningful engagement and relationship with a breadth of stakeholders including, in particular, the workforce. The document suggests that “A company should identify and prioritise stakeholder relationships for those affected by company operations and are integral to its ability to generate and preserve value”.
This is a wider governance recognition of the legal duty of each director under s172 Companies Act 2006, and the essential nature of supply chain relationships.
Use these six principles as a challenge to you and your company.
The question should not be “do we have to apply these Principles?” but “why would we not want to apply these Principles?”
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