Being told that companies are “embracing the spirit” of a regulatory change isn’t entirely reassuring. It makes you wonder what damage they’ve done to the letter of the thing in the process.
But that is the conclusion of the first review of the Wates principles, a corporate governance framework for private companies drawn up in 2018 by businessman James Wates.
This is the sort of thing that could usually fly quietly under the radar. But it has a certain significance at the moment.
It all goes back to BHS, a collapse that prompted concern about corporate governance failings in unlisted companies and the fallout from their failure as 11,000 people lost their jobs and nearly 20,000 pensioners were left in limbo.
The retailer’s demise prompted a memorably narky select committee performance by Sir Philip Green and a “world-leading package of corporate governance reforms” that included a legal requirement for big private companies to produce a statement setting out their corporate governance arrangements. The Wates principles were developed as a voluntary template to help meet this obligation.
This is not to be confused with the package of audit reforms put out to consultation by the government nearly a year ago, in the aftermath of further corporate failures, aiming to strengthen the UK as a “world-leading destination” for investment.
There is a connection, however. The latter includes more measures reflecting the growth and economic significance of private ownership and the expectations around standards and public engagement that come with that.
The private equity industry, into which the government is keen to send a bigger chunk of all of our pensions money, points to the Wates principles as one sign of an increasing focus on governance from private capital.
James Wates himself has argued that the government’s latest proposal to extend the definition of public interest entity, or PIE, to the largest, unlisted companies is overkill, and that his “comply or explain” principles which cover areas like board composition and stakeholder engagement, need time to work.
It is early days. Of the roughly 1,200 companies with reports to analyse, about two-thirds provided information about their governance arrangements. Of those, only 8 per cent made a truly token effort while nearly 60 per cent pointed to a recognised governance code, the most popular of which was Wates.
There are two ways to look at this. The first is that at least a third of the relevant companies are failing in what is a legal obligation under the 2018 Act.
The detailed analysis of the Wates disclosure is underwhelming too: the scores reflecting the quantity and quality of disclosures range from 18 to 41 out of 100. Only just over half the companies manage something as basic as giving any information about their chair; only 6 per cent mention specific targets for board diversity.
The other way is, broadly, to think it’s a decent start. “It’s a big cultural shift,” says Paul Lee, head of stewardship at Redington, who compares it to the slow adoption of listed governance reforms after the 1992 Cadbury report. “The fact that there is willingness by a big majority of these businesses to provide some degree of transparency is a major step forward.”
Either way, it should provide impetus to push ahead with plugging other gaps in the oversight of economically significant private companies. Someone needs to figure out the size and importance of the non-responders. But the thresholds on employees and revenues mean that these aren’t overburdened entrepreneurial upstarts: it’s notable that about a fifth of those reporting on governance just used the main UK code that applies to premium listed companies.
The next set of long-awaited audit reforms is expected to capture only the biggest of these companies. It would mean tighter requirements on who audits them and how that process is managed; it could impose new reporting on corporate resilience; and it would likely mean that a better resourced and more powerful regulator oversees all this.
That is a natural extension of the process that started after BHS, rather than a step too far.