Julia Irvine 20 Sep 2018 04:39pm

ICAEW says Wates principles don't meet government aims

The government needs to go back to the drawing board if it is to develop a credible long-term corporate governance regime for large private companies, ICAEW believes

It should also appoint a new chair and executive sounding board since the six principles designed by Sir James Wates and the Coalition Group have failed to meet its stated aim of ensuring high standards of corporate governance among large private companies.

In a strongly-worded response to the recent consultation on the Wates principles, ICAEW says, “The point that large private companies can have the same impact as public companies has been lost, the hoped for benefits of an increase in international reputation will not be enjoyed, the public and investors will not be reassured and the trend of delisting by public companies will not be reduced”.

It says that Wates and his Coalition Group – which included the likes of the CBI, the Investment Association and the TUC, should have used the tried and tested Corporate Governance Code (CGC) as a starting point to develop bespoke principles for large private companies. This would have “resulted in higher and more appropriate expectations” for the companies.

So, for example, The Wates principles do not mention strengthening the voice of employees and other non-shareholder interests at board level, even though in its response to the original corporate governance Green Paper consultation, the government said that they should.

ICAEW dismisses the Wates principles as “a placeholder pending changes to the broader landscape”.

“The development of a long-term and credible approach for private companies requires a new chairman and executive sounding board, and a refreshed coalition which reflects the spirit of Wates principle two [effective board composition],” it adds.

“The right balance of skills, backgrounds experience and knowledge requires an equal proportion of business representatives and representatives from stakeholder groups, eg consumer bodies and employee associations.”

ICAEW is not the only organisation to be concerned by the Wates proposals. Tomorrow’s Company says in its response that the draft principles are clearly missing some key issues of corporate governance – including assessment of how the board works together as well as individually, the size and composition of the board and the effectiveness of the chair.

The Quoted Companies Alliance welcomes the principles which it sees as identifying the main corporate governance concepts that are most relevant to private companies.

However, it notes that they do not refer to the dialogue that companies must have with investors, so that they understand their own investors’ needs and expectations.

“We consider this imperative for a board to not only understand how it can deliver long-term shareholder value, but also to enable it to clarify which matters it is mandated to decide on, and which are specifically reserved for shareholders,” it says.

ICSA: the Governance Institute also has complaints – even though it was a member of the Coalition Group. The principles have several flaws, it says, one of which relates to the relationship with shareholders.

ICSA points out that shareholders, particularly minority ones, may be taking a greater risk than those investing in listed companies because private companies are not subject to the same standards of governance as listed companies.

Another problem relates to conflicts of interest which, despite being “an area of significant concern in a number of private companies”, only rate a mention in the guidance but not in the principles themselves.