Gaps still need to be filled in the oversight of private companies



To hear that companies are “embracing the spirit” of regulatory change is not entirely reassuring. It makes you wonder what damage they literally did to the thing in the process.

But that is the conclusion of the first revision of the Wates Principles, a corporate governance framework for private companies developed in 2018 by businessman James Wates.

It’s the kind of thing that could usually fly quietly under the radar. But it has some meaning right now.

It all goes back to BHS, a collapse that sparked concerns about corporate governance failures at unlisted companies and the fallout from their failure as 11,000 people lost their jobs and nearly 20,000 retirees remained in limbo.

The retailer’s demise prompted a memorable performance by Sir Philip Green’s select committee and a ‘world-leading corporate governance reform package’ which included a legal requirement for large private companies to produce a statement setting out their provisions in corporate governance. The Wates Principles have been developed as a voluntary model to help meet this obligation.

This should not be confused with the package of audit reforms put out for consultation by the government almost a year ago, following further business failures, aimed at strengthening the UK as a “world’s leading destination” for investment.

However, there is a link. The latter includes more measures reflecting the growth and economic importance of private ownership and the resulting expectations for standards and public engagement.

The private equity industry, where the government wants to send more of our pension money, points to the Wates Principles as one of the signs of a growing focus on governance by 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 over the top, and that its principles “comply or explain which cover areas such as board composition and stakeholder engagement, need time to work.

It’s the beginning. Of the approximately 1,200 companies with reports for analysis, around two-thirds provided information on their governance arrangements. Of these, only 8% made a truly token effort while nearly 60% indicated a recognized code of governance, 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 companies affected are in breach of what is a legal obligation under the 2018 law.

Wates’ detailed analysis of disclosure is also disappointing: scores reflecting the quantity and quality of disclosures range from 18 to 41 out of 100. Only just over half of companies manage something as basic as giving information about their chair; only 6% cite specific goals for board diversity.

The other way is, basically, to think it’s a good start. “It’s a big cultural shift,” says Paul Lee, stewardship manager at Redington, who compares it to the slow adoption of governance reforms after the 1992 Cadbury report. “The fact that a vast majority of these companies are willing to provide some degree of transparency is a big step forward.”

Either way, this should provide momentum for moving forward in closing other gaps in the oversight of economically significant private companies. Someone has to determine the size and importance of nonrespondents. But the employee and revenue thresholds mean these aren’t overworked contractors: it’s worth noting that around a fifth of those reporting on governance simply used the main UK code which s applies to blue-chip listed companies.

The next round of long-awaited audit reforms should only affect the largest of these companies. This would mean stricter requirements on who audits them and how this process is managed; this could require new reporting on business resilience; and that would probably mean a better endowed and more powerful regulator overseeing all of this.

It’s a natural extension of the process that started after BHS, rather than a step too far.

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