The Wates Principles, developed by Sir James Wates CBE and his Wates Coalition Group, coincided with the Companies (Miscellaneous Reporting) Regulations in 2018. The principles were designed to give guidance and support to companies reporting on their corporate governance arrangements. 

Larger corporations with either 2,000 employees or a turnover of more than £200m and a balance sheet of more than £2bn are required to report on their corporate governance arrangements under the regulations. 

To mark progress on the take-up of the Wates Principles since their inception, the Financial Reporting Council (FRC) has been publishing reports on adoption rates and corporate governance reporting quality, starting with 2019/20 reports. 

In the second report, looking at 2021/22 records, the researchers – a team made up of academics from several prominent UK universities – took their work further, engaging with a range of stakeholders on reporting quality, including investors, regulators, board and governance professionals, and organisations such as labour unions and professional bodies. 

“Both reports evaluate how many companies among those in scope engage with the Wates Principles,” says Silvia Gaia, Professor of Accounting at the University of Essex, and one of the authors of the report. “For those that did engage, we developed, together with the FRC and the Wates Principles Coalition, a disclosure checklist to evaluate the extent and quality of the disclosure that these companies provided.”

From the 1,815 companies within the scope of the regulation in 2021/22, 547 (30%) specifically adopted the Wates Principles to discuss their corporate governance arrangements. The Wates Principles was the most adopted code by companies, with 76% adopting at least one element of it. 

However, 562 companies (31%) did not provide any information about their corporate governance arrangements, despite falling within the scope of the regulation. This is still a slight improvement on 2019/20 reports, where 34% of in-scope companies did not report on their corporate governance.

Stakeholder review

The researchers spoke to the various stakeholders in a focus group setting, divided into their specific demographics. Each group was asked to review extracts of reports that represented a variety of approaches, assessing the usefulness of the information presented. 

The focus groups showed a unanimous interest in Wates Principles-based disclosures, primarily when conveying the trustworthiness of purpose, strategy, governance and as evidence of strong oversight from the board. Its specific disclosures were also commended as reflective of good accountability and transparency.

But various stakeholders criticised the lack of information on data integrity, and the extensive use of ‘boilerplate’ language. This was compounded by the unstructured nature of the disclosures, which made them hard to read. 

“Only 13% of the disclosures provide specific information, such as names of persons/locations, firm names, quantitative figures/metrics, times/dates,” says Teerooven Soobaroyen, another author of the report and Professor of Accounting at Aston University. “The absence of such details tends to limit the information’s usefulness and significance.”

Recommendations for improvement

To improve reporting, Gaia and Soobaroyen recommend the following:

1. ‘Context-relevant and time-specific’ explanations

“It seems one of the unintended consequences of the ‘apply and explain’ regime is a rather static and repetitive approach to the narratives,” says Soobaroyen. He recommends additional guidance from professional organisations and associations to disclose how they apply the principles in the current financial year from an incremental/change and context/period-specific perspective. Aspects that have been disclosed previously and have not changed don’t need to be disclosed, or can be summarised. “Narratives could focus on providing examples and illustrations of how the principles have been applied in the current year.” 

2. Standardised presentation to improve readability

Companies should structure their corporate governance report in line with the Wates Principles, with appropriate signposting to cross-referenced information. Standard information (such as board composition, board member profile, sub-committee structure and activity) could be presented in a summarised and accessible way.

3. Board Chair’s statement to demonstrate board engagement with Wates Principles

“On behalf of the board, it is recommended that a Chair’s statement should provide an overarching narrative reflecting on how the board has actively engaged with the Wates Principles in the current year and the outcomes thereof,” says Gaia. This may reflect a specific aspect or workstream, such as a review of remuneration policies. In doing so, it can provide more specific evidence and a story of how the board actually discharges its accountability to the company and to its shareholders/stakeholders.

4. Risks and opportunities

“We would recommend companies improve disclosures over opportunities, as they are currently under-represented,” says Gaia. “Additional guidance on opportunities and risks would be beneficial.” For example, additional guidance might clarify confusion about who has responsibility over opportunities. It might also give more clarity about the information to be provided and improve corporate governance disclosure on opportunities and risks.

5. Business groups

“The similarity scores between firms in the same groups are worrisome,” says Soobaroyen. “While it could be expected to see a business group-wide behaviour when it comes to subsidiaries disclosing corporate governance arrangements, it is recommended that subsidiaries provide more specific firm-level information, to outline the context and circumstances unique to the subsidiary.” 

6. More stakeholder inclusivity

The findings reveal an emphasis on the workforce in Principle Six, but there was a lack of disclosure on impact/outcome of engagement with other stakeholders. “Although the workforce is undoubtedly a crucial stakeholder group, its emphasis on the principles seems to be at the detriment of other stakeholder groups/interests,” says Gaia. “Furthermore, very little is discussed about the impact of such engagement on the company, board and stakeholders. It is therefore recommended to guide companies to consider the perspectives of a wider set of stakeholders in the disclosures and to discuss the outcomes/impact of such engagement.”

7. Mechanisms for ensuring data integrity

Boards should consider introducing and providing information on the mechanisms in place to ensure the integrity of information being used and disclosed.