IoD responds to analysis of application of Wates Governance Principles to large private companies

The Financial Reporting Council (FRC) and the University of Essex have just published their first assessment of how large private companies are fulfilling their new governance reporting requirements.

According to the Companies (Miscellaneous Reporting) Regulations 2018, large companies with more than 2000 employees and/or a turnover of more than £200 million and a balance sheet of more than £2 billion now have to publish a corporate governance statement for financial years beginning on or after 1 January 2019. In this statement, they may choose to reference their application of the Wates Principles or the recommendations of another corporate governance code.

Commenting on the report’s findings, Dr. Roger Barker, Director of Policy and Corporate Governance at the IoD, said:

“Although this is only the first year that large private companies have been subject to these new governance requirements, it’s nonetheless disappointing that one third of the companies examined in the study did not publish a corporate governance report at all.

“In addition, less than a third of the companies examined chose to utilise the Wates Principles as their benchmark for good governance, despite the tailoring of these Principles to their specific context.

“There is a pressing need to understand why so many companies – all of which are substantial entities – did not feel it necessary to communicate their governance arrangements. A credible governance framework is a key means of winning the trust of stakeholders and wider society, not just for listed companies but for all kinds of organisations. Hence, the absence of meaningful governance disclosure is a missed opportunity for both the companies themselves and the wider business community.

“Amongst the companies that did publish a corporate governance statement, the report painted a mixed picture in terms of the quality of disclosures. A number of companies were highlighted as demonstrating a meaningful level of disclosure on specific issues, and deserve credit for taking governance seriously.

“However, in general, there was a lack of detail around how governance principles were being applied in practice. Disclosure in respect of corporate purpose was highlighted as an area where many companies need to up their game.

“Going forward, there is still work to be done to convince some large private companies that good governance is an opportunity and not a burden. The pandemic may have disrupted the plans of some to be more active in this area. But, as we emerge from the pandemic, we must encourage entities of all sizes to develop a governance foundation that is proportionate and clearly communicated to stakeholders.”