05 April 2022
Since 1 January 2019 legislation has required large private companies to disclose their corporate governance arrangements in their directors’ report and on their website.
The Wates Principles were introduced in 2018 to help large private companies comply with these requirements. The Financial Reporting Council (FRC) has conducted research into the quality of disclosure of companies adopting the Wates Principles.
Overall, the research found that companies are providing good disclosures on general information about their formal policies. There is room for improvement in disclosures relating to how the formal corporate governance policies are applied in practice.
Principle one: Purpose and Leadership
Disclosures relating to this Principle were disappointing, with the lowest level of disclosure out of the six Principles. The research identified that companies disclosed on average less than one fifth of the disclosure elements within this Principle. There are improvements to be made relating to the linking of the purpose and behaviours of a company, particularly whether their purpose is aligned to the company’s business model and business practices.
Principle two: Board Composition
Disclosures on board composition tended to focus on the chair of the board, with fewer disclosures on the size and structure of the board. There was limited disclosure relating to the balance, diversity and effectiveness of the board.
Going forward, companies should look to enhance disclosures relating to how the characteristics of the directors facilitate effective decision making, the process used by the board to understand business needs and stakeholder interests, and how the overall effectiveness of the board has been evaluated.
Principle three: Director Responsibilities
Disclosure of direct responsibilities was one of the most frequently explained Principles in terms of how it had been applied. On accountability, the most disclosed item was the establishment of the board and maintenance of corporate governance practices.
However, there was limited disclosure on the processes in place to periodically review the governance process and the accountability of the board as a whole.
Principle four: Opportunity and Risk
The disclosures for this Principle received the highest score in terms of following the guidance in the Wates Code. However, there were significantly more disclosures on opportunities than risks. This reflects that the guidance related to risks is more detailed and therefore more specific information required to obtain higher disclosure score.
The disclosures on opportunities would be enhanced by identifying the process by which future opportunities are identified.
Principle five: Remuneration
The research identified that renumeration policies were not widely disclosed, which companies should seek to address. The most information disclosed was in relation to the delegation of remuneration decisions and for subsidiaries the remuneration practices adopted by the parent.
There was limited disclosure on the rationale for remuneration structure, consideration of risks in respect of renumeration levels and the pay ratios considered. In addition, most of the companies reviewed did not disclose the alignment of remuneration structures for directors and the senior management team with the purpose, values, or strategy of the company.
Principle six:Stakeholder Relationships and Engagement
A high number of companies provided details about who their key stakeholders are. However, only a few companies went on to explain the dialogue that the board had with these stakeholders, whether any dialogue with stakeholders impacted board decision-making and how stakeholder engagement helped to inform board decisions.
Disclosures on workforce engagement needs to be enhanced in future reporting periods. Whilst a high proportion of companies provided some general information about the relationship with their workforce, a limited number of companies disclosed specific information on the relationship, including how dialogue with the workforce impacted on board decision-making.
Going forward, companies will need to:
- disclose more detailed information in relation to the application of the six Principles to provide readers with a comprehensive understanding of the corporate governance requirements in place
- discuss more instances and/or circumstances relating to a given corporate governance practice to evidence how the Principles have been applied; and
- enhance the use of cross references to disclosures of any items in other sections of the annual report.