Discussing the latest review of reporting against the Wates Principles
Published: 12 August 2024
13 minute read
Listen to the FRC’s latest In Conversation podcast episode featuring Sir James Wates CBE, Kate O’Neill, Director of Stakeholder Engagement and Corporate Affairs, and Maureen Beresford, Acting Director of Corporate Governance and Stewardship. They explore today’s review of reporting against the Wates Principles, and discuss the Wates Principles' flexibility, challenges in meaningful disclosure, and the importance of stakeholder engagement.
Transcript
0:10
Hello and welcome.
0:11
My name is Kate O'Neill.
0:12
I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC.
0:16
And this morning I'm hosting another in conversation today with Sir James Wates who is the chair of the Wates Coalition, and Maureen Beresford, the Acting Director of Corporate Governance and Stewardship here at the FRC, who undertakes the secretariat for the Coalition.
0:30
This year's version of the Wates report on the application of its principles to private companies is being published and has some really rich data and information about how private companies apply the weights principles in its corporate governance and reporting.
0:44
So welcome James and Maureen.
0:45
And I'll turn to James first to ask some questions about not just the principles that this year's report.
0:50
But before we jump in, it'd be great to understand what was the driving motivation behind creating this corporate governance framework for large private companies.
1:00
Sure.
1:00
Good morning, Kate.
1:01
Well, I think the overarching thing to me is that business must continually strive to build trust.
1:06
We've had various business scandals over the years, and that creates an environment that people say, well, what is business up to?
1:11
Can we really see what they're up to so we can actually build that trust?
1:14
I think business has a responsibility to do that.
1:17
I think good governance combined with transparent and meaningful reporting really does help foster strong relationships with stakeholders.
1:24
And that in itself I think helps to build trust.
1:27
And whilst the UK Corporate governance code is in place for premium listed companies, before we developed the weights principles, in 2018 there was nothing that large private companies could use.
1:35
And large private companies are by their very nature very diverse.
1:38
So we need a tool that could be used by family businesses, private equity owned businesses and wholly owned subsidiaries of public credit companies.
1:45
I wanted to develop something that was genuinely useful, a bit like holding up a mirror to yourself to see just how are we doing, Can we reflect on what we're doing, how can we do better, what improvements do we need to make?
1:56
And I guess says being a growth of a number of private companies by size and by type, talking about the diversity you referred to.
2:04
So the principles must be being used by even a wider number of companies than was originally envisaged.
2:09
We wanted something that could be used by any company of whatever size or scale.
2:14
That just made sense.
2:15
So we start to the core principles of good governance that pretty much everybody agrees on.
2:19
They need to be flexible so that, as I said, any organisation can use them.
2:22
They're not just boxes that get ticked.
2:24
And the thing about these principles that they can be applied uniquely by each company so that each company can take the principle and make it work for what they do and how they work in their sector.
2:33
So to me, the flexibility of universality for the weights principles, I think has been well received.
2:37
That's not just in the UK but internationally as well, which I've heard anecdotally, talking to other business organisations around the world.
2:43
I'm pleased with the way that people have actually adopted them more broadly than perhaps where they were initially set out.
2:48
And so those are the basis that you think the principles have been so widely embraced.
2:53
Not one size fits all.
2:54
So these principles have that flexibility from what your saying
2:56
Absolutely. That was very much the intention.
2:59
It wasn't about, as I said, ticking boxes about actually giving companies the opportunity to have a framework against which they could test themselves, look at what they're doing and actually report on the relevant to themselves as a business, right.
3:11
So the research that's being published highlights some areas where companies are still struggling to provide meaningful disclosures, such as linking their purpose to strategy, culture and values, which are all big words in themselves.
3:23
What advice would you give to companies to improve their reporting in these areas?
3:27
So I suppose the first thing you got is make sure we get the fundamentals right.
3:30
I would say that being a builder by nature, if you don't get the foundations right, then everything else falls down.
3:35
Purpose is absolutely fundamental.
3:36
It's not just a slogan.
3:38
That's where a lot of businesses struggle.
3:40
They come up with fantastic purpose, but then it just sits there.
3:43
It's actually got to be integrated into everything that the enterprise does.
3:45
Once you think through your purpose, you then have to speak to all of your stakeholders about it and make sure that it's actually driving your strategy.
3:51
And if purpose drives your strategy, then the reporting will naturally flow from that and you'll be closing the circle, which I think is very, very important when you're trying to report on this.
3:58
And the focus groups raise concerns about the use of boilerplate language, which you've kind of just referenced, where it doesn't really relate to company specific context, etcetera, in some of the government statements.
4:09
How can companies strike a balance between following the principles that you've laid out, but also tailoring the disclosures to their unique circumstances?
4:17
Applying and explaining how a company is following the Wates principles is not something you just do at the end of the year.
4:22
You've actually got to be on it the whole time.
4:24
So Wates, for example, every board meeting pause, we take note of things that we've discussed that relate to the principles.
4:30
So that when we're actually looking at what we've been talking about at the end of the year, we've got a basket of things that helps ensure that we have the specific examples that we can actually incorporate into what we're talking about when we produce our annual reports.
4:41
And I think you have to keep in mind that the Wates principles themselves are very broad.
4:45
They're not overly prescriptive, and that itself gives companies a lot of flexibility.
4:48
So again, it's making it work for yourself.
4:51
And my hope is that companies report against the Wates principles year after year.
4:54
They embrace the flexibility that we really try to and they don't revert to just boilerplate language and taking last year's numbers and putting in new numbers in this year's.
5:02
And so one of the key findings in this year's report was that subsidiaries often provide very little insight into their own governance arrangements, deferring instead to the parent company.
5:13
As an advocate of transparency, what's your view on how subsidiaries should approach their corporate governance reporting?
5:19
It starts with actually understanding the individual responsibilities of directors.
5:23
It doesn't matter if you're a director of a wholly owned subsidiary, you have responsibilities that ensuring that that particular entity meets all the legal requirements.
5:30
The Companies Act.
5:30
So as a director of a subsidiary, you have to do these things.
5:34
If your entity follows the same governance principles as those your parent company, then you need to explain why you do that as a company that would stand alone under the reporting criteria.
5:42
You then have to explain how you do that as well.
5:45
It's how those circumstances stand out and demonstrate that how that individual subsidiary business operates differently from the parent company.
5:52
Because it some of these huge multinational companies that might have UK subsidiaries that have to report under the the law, They would be the ones that have to explain how they do it and why they do it.
6:03
Because they might be doing something completely different to what they're preparing in America is doing because they are actually reflecting the circumstances of their particular sector or the country they're in.
6:12
So I think that's why to me the flexibility is so important that you can actually not just follow the template from head office, you actually make it work for yourself in country.
6:22
And I guess that's where you can move away from any designer, use boilerplate reporting or tick box exercise.
6:27
Yeah.
6:28
The principles emphasise the importance of stakeholder engagement.
6:31
How can boards of this nature ensure that they're genuinely listening to, acting upon the views of their key stakeholders?
6:39
The first thing you have to acknowledge is that the term stakeholder in itself is a very broad brush.
6:44
I remember when I first came into business, people didn't talk about stakeholders.
6:47
He just talked about shareholders.
6:48
So the stakeholder community is much wider.
6:51
And I think the guidance notes in the way its principle does say stakeholders includes the workforce, customers, suppliers, other materials, stakeholders specifically that companies, circumstantial sectors such as the regulators, governments, pensioners, creditors and community groups.
7:03
So it's a wide, wide base that you've got to understand what they want to hear from you.
7:08
Certain people will be interested in certain parts of your reporting and other people will be interested in different parts.
7:13
So if you like, you might take a pension fund investor who's interested in the financial returns because that's what's very important to them.
7:19
But on the other hand, you might have somebody from the Green Reporting Council or whoever who actually is much more interested in what you're doing about the environment.
7:25
You've got to actually wrap the whole thing up so that people can look at what's relevant to them, but actually paints a really good picture of what the company does and how it does it.
7:33
So I think Boards need to foster a very strong, strong relationship based on two way communication with all of these stakeholders.
7:39
A good foundation for these strong relationships is actually providing a fair, balanced and understandable assessment of the company's position and prospects in that company's annual report.
7:48
That I think is a foundation of respect reflecting that the true meaning of stakeholder, they have a stake in a success of the enterprise and they wanted to succeed.
7:56
All stakeholders should want the business that they are looking at to succeed.
7:59
I also - and be around for the long term.
8:01
Yeah, absolutely.
8:02
It's not here today, going tomorrow.
8:03
It's actually about building a long term sustainable future.
8:06
And I strongly believe that a big part of this is directors being fully engaged with the business and its stakeholders, especially the workforce.
8:12
And this includes getting out of the boardroom and actually going out to see where the work is happening.
8:16
You know, we're lucky: my primary business, the weights group, as a building business, we have lots of sites that we can go and look at and see what we're doing and really talk to the guys and girls on site about what they're doing, the challenges they face in a whole range of things.
8:27
And as a board, that's incredibly insightful.
8:29
I would really encourage all board members to get out and about and see what's happening in the business, understand what's happening in the ground, talk to all that wide range of stakeholders.
8:38
Absolutely.
8:38
I mean, having that linkage between the board and the real experience of the company is absolutely vital.
8:43
So if you wanted the companies or anyone reading the report take away a key message or a couple of key messages, what would it be that you'd really want them to apply or consider based on the findings of this latest research?
8:57
First and foremost, be yourself.
8:58
Don't follow the herd.
8:59
So the authenticity - absolutely - authenticity is critical.
9:02
So be yourself, be proud of what you're doing, explain what you're doing, open yourself up and say, yeah, we don't get it all right the whole time, but we're really proud about doing this.
9:11
We could do more in this area.
9:12
So use as an opportunity to to look at self improvement.
9:16
There is no doubt that good reporting is not about borrowing boiler pay text from others.
9:20
It's about articulating the unique challenges that your company is facing and how you're addressing them.
9:24
That's such a key message, James, because people want to say all the words, but actually you've got to really show that they're meaningful and they actually are linked to real outcomes.
9:34
It comes back to authenticity.
9:35
If you be yourself and you don't follow somebody else's boilerplate, then that's authentic.
9:38
Yeah, you're actually able to say this is what's important to us.
9:41
This is what we want to tell people about what we're doing.
9:43
We're proud of this.
9:44
That really recognises that perhaps we don't get it right here.
9:46
We want to do more and being brave enough to say this is an area that we want to improve in.
9:50
That to me is the difference between a principle based approach and a code approach where you're actually just ticking boxes.
9:56
Very interesting.
9:57
And the range of types of private companies, I mean you touched on this a little bit earlier.
10:00
This is across the whole of corporate Britain.
10:02
And as you've said, you've talked to other people in other jurisdictions and different geographies.
10:07
This isn't just about premium listed big companies.
10:10
This is people across regions, companies doing very diverse and different types of industries.
10:16
The Coalition group is what it says on the team that's bringing together the coalition of very different components.
10:21
Yes, absolutely.
10:22
And I think sometimes people need to perhaps look beyond what you see in the business pages.
10:27
The business pages tend to focus on the big premium listed companies where there's corporate activity, all this stuff going on.
10:32
Behind that there needs to be an understanding that private companies make huge contributions to the UK economy.
10:37
The 547 companies that apply the weights principles.
10:39
Currently a combined annual turnover of more than £850 billion.
10:43
The estimated 1800 or so companies that go for the categorised as large private companies have a combined annual turnover of more than £2.5 trillion.
10:52
Yeah, well, when you say those numbers out loud, I mean that is a huge economic power and force, yeah.
10:58
Yeah.
10:58
And family businesses alone I think are worth focusing on because whilst many of them are small as a sector, family businesses employ over 14 million people in the UK.
11:05
And this is where the Chancellor will be excited.
11:08
I hope - they pay £200 billion in tax revenue.
11:11
So as private businesses, family business, we make a massive impact and I think government needs to nurture this economic impact and on our side, private companies to continually improve government reporting.
11:20
So there is trust from governments that they are backing the right people to do the right thing.
11:24
Yeah, and I guess it's getting that trust from all your stakeholders, including government, and the transparency of stakeholder engagement and reporting help do that.
11:32
It does.
11:33
Undoubtedly the reason that the legislation came up about reporting for large companies was because of some spectacular corporate failures.
11:40
Now, some of them were PLCs, but others were privately helped.
11:42
And I think the reality is if something happens, then the newspapers get all over it.
11:46
Government is seen, has got to be seen to be doing something.
11:49
So they, they kind of say, well, we've got to regulate, we've got to legislate actually as business, we've got to self regulate and self legislate.
11:55
So actually the trust is there, that business is doing the right thing.
11:58
And I guess nothing's going to legislate to stop bad decisions or bad behaviours, but continual improvement.
12:04
And I think the report is very much about this.
12:06
Is it improving reporting companies, being authentic, being transparent with their stakeholders can only lead to more trust and more understanding of the dynamics of not just the sector, but the individual company.
12:18
Absolutely.
12:19
And I think that it does come down to the understanding is making it simple for people to understand what the company that they're looking at is about, what it's trying to do, what it's trying to achieve, and recognising that actually they're doing the right things.
12:30
They're doing the sort of things that I support that I like is taking cognizance of long term interest.
12:34
It's taking cognizance of the workforce.
12:35
It's taking cognizance of the environment, it's looking to the future.
12:38
I mean, all that sort of thing I think is incredibly important for people who are looking at businesses to see if they're the sort of business they want to be a customer of or employed by partner with or.
12:47
Yeah.
12:47
And it is these type of themes get away from what's often talked about not just in the press but by other commentators, the short termism of, you know, I want it now and it's going to happen now.
12:56
It's about helping the growth and the journey of the growth for many of these companies.
13:00
Absolutely.
13:00
Business is for the long term.
13:02
Business is the wealth creator.
13:04
And that to me is what needs to be supported because that's the way as a country we will achieve economic prosperity through good business, being well done, making a contribution to society and creating the revenues that government can distribute to make a fairer and more equitable society.
13:19
No thank you, James.
13:20
And those figures really resonate, particularly as we enter a new period of a different government and also hopefully a different perspective on how to support UK prosperity and growth.
13:31
Maureen, I know that you play a role as leading the FRC's activities as Secretariat to the Coalition.
13:37
So why is it important to assess the reporting?
13:40
Because the FRC doesn't have any enforcement powers over the reporting or the findings of the report.
13:46
Yeah, thanks, Kate.
13:47
Good morning.
13:48
And I thought James made some really powerful comments there about importance and trust and authenticity, etc.
13:54
We'd look at the reporting and we do an assessment and we work with partners to do that assessment.
13:59
I think you've got to remember the Wates principles are in their infancy.
14:02
They've only been around for a few years.
14:04
It's not like the UK corporate governance code that's been around for 30 years or so.
14:08
And what we want to do here is we want to see good governance.
14:11
And by actually assessing that reporting and getting that out there and demonstrating what good looks looks like, we're hoping to give those reporters some ideas, suggestions, and help them move forward and be more open, be more brave about their reporting because they can see that their peers are doing that.
14:27
So by offering those case studies, by seeing what good is, by listening to the stakeholders.
14:32
And in this report, a lot of the stakeholders said what they were looking for in the reporting.
14:37
And I think that's what we want to do with our assessments.
14:39
It's not about showcasing poor reporting.
14:42
It's about saying, well, there is maybe some boilerplate, but look at the good examples.
14:46
This is what we want to say.
14:47
And I think that's how we can raise standards across the board.
14:50
And I know Maureen, you and I have discussed this many times.
14:53
Guidance is supposed to be guidance.
14:55
It's supposed to be a tool to help people use the principles, report against them.
14:59
How do we stop people thinking that that's prescriptive and actually part of the principles and much more of that tool kit to help people develop their own particular reporting particular to their company in that circumstances?
15:11
I think it's a tough one, Kate, isn't it?
15:13
Because people see guidance and they think, oh, maybe I should include this, maybe I have to include that issue.
15:18
But I think we go back to what James said.
15:20
It's about applying the principles as they relate to your company.
15:24
And the more we can get that message out through podcasts like this, through the assessments, it's for companies to think about the principles.
15:31
They do give a lot of flexibility and the guidance is just there to give some hints, some tips and some suggestions about what to think about.
15:38
All we can do is the FRC and the coalition members is to, to discuss with companies.
15:43
These are things that you might want to consider.
15:45
It's not a tick box.
15:46
The guidance shouldn't be there to go through step by step.
15:48
Tick, tick, tick.
15:49
Have we done this, this and this?
15:51
It's about looking at the principles in the context of your own company.
15:55
I, I feel I'm repeating what James said and working through that to demonstrate your good governance within that company.
16:01
Now, I think as you said, Maureen, there's been some really powerful messages here, but I think it's the flexibility of this that I think companies obviously embraced because it does help them tell their story in a way that authentic and reflects the realities of their company.
16:14
We've seen from the research that a number of companies have fallen out of scope of the legislation, but they continue to follow the principles and that demonstrates that they found them beneficial to their company.
16:24
And I do remember when we first did an event on the principles and following the first round of reporting, companies are saying that it gave them the opportunity to kind of look inwardly at their governance and think about what was important to them.
16:36
So we hope that, as James said, it's not just companies that have to follow the Wates principles, it's which one than that and companies see a benefit in doing that.
16:44
Well, James, you've just heard some very strong endorsement for Maureen.
16:47
But I think what's come through this podcast is people embracing the principles and wanting to use them and celebrating their flexibility and adaptability.
16:55
So congratulations on the report.
16:58
And I think it'll be thought provoking for companies using the principles and giving them some examples, some some good practise, maybe even best practise.
17:05
So congratulations and long may it continue that this is used as a driver for what you talked about James, that sustainable long term business models.
17:14
Thank you, Kate.
17:15
Yeah, let's let's hope so.
17:17
OK.
17:17
Thank you both.