In an era where corporate transparency is not just valued but demanded by stakeholders, the quality of a company’s governance narrative has become a critical measure of its integrity and long-term viability. The Financial Reporting Council (FRC) has cast a spotlight on this very issue with the publication of its inaugural review of how large private companies are applying the Wates Corporate Governance Principles. This pivotal report, coming as the FRC assumes direct oversight for the principles, is intended to serve as a crucial guide for the upcoming financial reporting year. It aims to elevate the standard of disclosure, pushing organizations beyond generic compliance to provide meaningful, company-specific insights. The findings are particularly relevant for companies mandated to report against the framework and for those voluntarily adopting it as part of their journey toward an Initial Public Offering (IPO), signaling a clear expectation for more substantive and authentic communication.
Understanding the Wates Principles and Their Scope
The Regulatory Mandate
The legal foundation for this level of corporate disclosure is firmly established within The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, which compel certain large private and unlisted public entities to publish a formal statement detailing their corporate governance structures and practices. The Wates Principles were developed specifically as a practical, voluntary framework to assist these companies in meeting this statutory obligation with clarity and relevance. This reporting requirement is not universal; it is precisely targeted at companies that demonstrate significant scale and economic impact. The thresholds for this mandate are met if a company has a workforce of over 2,000 employees or if it concurrently possesses a turnover exceeding £200 million and a balance sheet total surpassing £2 billion. By setting these high bars, the regulation ensures that only companies with a substantial footprint, whose internal governance can have wide-ranging effects on employees, suppliers, and the broader economy, are subject to this heightened level of public scrutiny and accountability.
This regulatory framework underscores a fundamental shift in how corporate responsibility is perceived for large private entities, moving them closer to the transparency standards expected of their publicly listed counterparts. The creation of the Wates Principles was a direct response to the need for a governance code that was robust yet flexible enough to accommodate the diverse ownership structures and operating models found in the private sector. Unlike the more prescriptive codes governing the public markets, the Wates framework encourages a narrative-driven approach. The core objective is not simply to tick boxes but to foster a deeper consideration of how governance underpins a company’s strategy, culture, and stakeholder relationships. The regulations and the principles together create a powerful mechanism for encouraging self-reflection and continuous improvement within these influential organizations, aiming to bolster trust and confidence in a vital segment of the economy by making their internal workings more visible and understandable to the outside world.
The Six Pillars of Governance
The FRC’s review is meticulously structured around the six foundational Wates Principles, which collectively provide a holistic framework for effective corporate governance. The first three principles establish the internal architecture of leadership and accountability. Principle One, Purpose and Leadership, asserts that an effective board must not only develop but actively promote a clear corporate purpose that serves as the organization’s north star, ensuring that its values, strategy, and culture are seamlessly aligned. Principle Two, Board Composition, addresses the human element of governance, calling for a chair who leads an effective board comprised of individuals with a balanced mix of skills, backgrounds, and experience. It emphasizes that board members must have the necessary capacity to contribute meaningfully and that the board’s size should be appropriate for the company’s scale and complexity. Principle Three, Director Responsibilities, focuses on clarity and process, requiring that the board and its individual directors have an unambiguous understanding of their duties and lines of accountability to support robust, evidence-based decision-making in an environment that values constructive challenge.
The latter three principles extend the governance framework outward, connecting the company’s internal operations to its external strategy, stakeholders, and long-term success. Principle Four, Opportunity and Risk, highlights the board’s dual responsibility to proactively seek opportunities for value creation while simultaneously establishing rigorous oversight for identifying and mitigating risks that could threaten the company’s viability. Principle Five, Remuneration, tackles the often-contentious issue of executive pay, mandating that compensation structures should be directly linked to the long-term sustainable success of the company. A crucial element of this principle is the call for fairness and proportionality, ensuring that executive rewards are considered in the context of pay and employment conditions throughout the entire organization. Finally, Principle Six, Stakeholder Relationships and Engagement, modernizes the concept of corporate duty, requiring directors to foster effective relationships with all key stakeholders, including employees, customers, suppliers, and the community, and to ensure their interests are genuinely considered in the board’s strategic decision-making processes.
The FRC’s Verdict on Current Reporting
A Mixed Landscape of Strengths and Weaknesses
The FRC’s comprehensive analysis of corporate governance statements revealed a decidedly mixed performance, with clear areas of proficiency alongside significant opportunities for improvement. On the positive side, the report noted that companies generally demonstrated strong and transparent reporting in two key areas: risk management, as outlined in Principle Four, and stakeholder engagement, covered by Principle Six. This suggests that many organizations have mature processes in place for identifying, assessing, and mitigating risks and are relatively comfortable articulating how they interact with their workforce, customers, and supply chain partners. This proficiency may stem from the fact that these areas are often tied to tangible operational metrics and existing business functions, making them easier to document and explain. Furthermore, the feedback collected by the FRC was encouraging, confirming that companies, especially those enhancing their governance frameworks in preparation for a potential IPO, find the Wates Principles to be a valuable and highly practical tool for structuring their approach and disclosures.
In contrast to these strengths, the FRC’s review uncovered a notable lack of substance and depth in the reporting against three other critical principles. Disclosures related to Purpose and Leadership (Principle One), Board Composition (Principle Two), and Remuneration (Principle Five) were frequently found to be generic, superficial, or lacking in meaningful detail. For instance, statements about corporate purpose often read like marketing slogans rather than genuine reflections of the company’s guiding philosophy and its integration into strategy and culture. Similarly, discussions on board composition tended to list director biographies without explaining how the specific mix of skills and experiences contributes to effective oversight and decision-making. Remuneration reports, a perennial area of stakeholder interest, also fell short, often failing to provide a clear and compelling link between executive pay and the company’s long-term sustainable success. These shortcomings indicate a tendency toward boilerplate compliance rather than authentic storytelling, ultimately failing to build the stakeholder trust that is the central goal of the governance framework.
The Call for Deeper Insight
Beyond the content of the disclosures, the FRC highlighted a significant structural issue that undermines the overall quality and effectiveness of many annual reports. The review observed that the coherence of the report was often compromised because different sections were prepared in isolation by various internal teams or individuals. This “siloed” approach to report creation frequently results in a document that is disjointed, repetitive, and difficult for a reader to navigate. For example, discussions of strategy in one section may not align seamlessly with the risk disclosures in another, or the remuneration report might appear disconnected from the company’s stated purpose and values. This lack of integration creates a fragmented narrative that fails to present a holistic and convincing picture of the company’s governance and performance. The FRC strongly cautioned that this disjointedness not only frustrates stakeholders but can also signal a lack of internal alignment and a missed opportunity to communicate a powerful, unified corporate story.
To remedy these structural deficiencies, the FRC provided clear and actionable recommendations for companies to adopt. The regulator strongly encourages organizations to shift their mindset and begin treating the annual report as a single, cohesive, and fully integrated document rather than a collection of disparate parts. This requires greater collaboration across departments and a clear editorial vision from the top. A key tactic to achieve this is the more effective use of cross-references, which can seamlessly connect related information throughout the report and guide the reader through a logical narrative flow. For instance, a discussion on a strategic opportunity should link directly to the related risks and the board skills required to oversee it. Furthermore, the FRC emphasized the importance of actively reducing duplication. By eliminating repetitive information, companies can create a more streamlined, concise, and engaging report that respects the reader’s time and delivers its key messages with greater impact, ultimately enhancing transparency and building trust.
The Apply and Explain Philosophy
A central theme woven throughout the FRC’s review was the inherent flexibility of the Wates Principles, which operate on an “Apply and Explain” basis. This approach stands in contrast to the more rigid, prescriptive codes often applied to publicly listed companies, which can sometimes lead to a check-the-box mentality. The FRC made it clear that there is no “one-size-fits-all” solution to corporate governance, as it is intrinsically linked to a company’s unique leadership style, organizational culture, stage of maturity, and specific industry sector. Mark Babington, the FRC’s Executive Director of Regulatory Standards, reinforced this point, stating that the framework’s flexibility is its “greatest strength.” The intention was never to create a rigid set of rules but rather to provide a set of principles that prompt deep consideration and encourage companies to articulate their own, bespoke governance story. This philosophy empowers companies to explain how their specific practices achieve the underlying objective of each principle, fostering a more authentic and insightful form of reporting that is far more valuable to stakeholders than rote compliance.
Ultimately, the FRC’s guidance was a clear call for companies to leverage this flexibility not as a loophole for boilerplate disclosure but as an opportunity to “tell their governance story more effectively.” The review suggested that the most compelling reports were those that moved beyond mere assertion and provided concrete examples and outcomes that demonstrated their governance in action. This required a shift from simply stating compliance to explaining the “how” and “why” behind their governance choices, thereby building genuine trust through transparent and bold communication. The objective was to encourage reporting that was outcome-focused, illustrating how the board’s composition, purpose, and stakeholder engagement translated into sustainable value creation. By embracing this philosophy, companies had the chance to transform their annual report from a document of compliance into a powerful tool for building confidence and articulating their unique identity and commitment to sound governance.
