Applying the Wates Principles in family firms
The application of the Wates Principles can provide guidance to help large private businesses to keep their governance on track.
The UK has long been at the forefront of corporate governance, setting standards for transparency, accountability and ethical business conduct. In this spirit, the Wates Corporate Governance Principles were introduced in 2018 as a framework for large private companies, including family-owned businesses. As large family firms continue to play a pivotal role in the UK economy, the adoption of the Wates Principles offers a way of enhancing their governance practices while preserving their family-centric values.
Developed by a coalition led by Sir James Wates and issued by the FRC in 2018, the Wates Principles provide large private businesses in the UK with a governance framework emphasising company purpose, board roles, risk management and stakeholder engagement. These principles are designed to be applied on a comply or explain basis, providing flexibility for businesses to adapt their governance practices to their unique circumstances. For large, UK, family-owned businesses, the adoption of the Wates Principles provides an opportunity to demonstrate transparency and accountability, as well as align governance with the values and long-term goals inherent in family ownership.
A new report from the Family Business Research Foundation examines whether corporate reporting practices and the propensity to adopt the Wates Principles is affected by family ownership. The research used data from 2019/20 annual reports to compare the adoption of the Wates Principles and the extent of governance reporting among large family firms versus non-family firms.
Adoption and disclosure
The study found that the Wates Principles were by far the most commonly adopted code among large private firms in 2019/20. Family businesses were slightly more likely to adopt the Wates Principles compared with non-family businesses, with around 32% of family firms embracing the principles compared to 28% of non-family firms. This suggests that large private family businesses are more likely to recognise the importance of formal corporate governance principles compared with large private non-family businesses.
Among those firms who adopted the Wates Principles, the overall pattern of disclosure in the areas covered by the Principles was broadly similar among family and non-family businesses. For both family and non-family firms, the extent of disclosure was greatest in those areas related to opportunity and risk, and stakeholder relationships. Less frequently disclosed areas included company purpose and leadership, and board composition.
Family businesses tended to perform well in areas such as stakeholder engagement and risk management. While the adoption rate is encouraging, the depth of disclosure in some key governance areas remains a challenge. For example, the research reveals that large family firms were less likely than their non-family counterparts to disclose detailed information on composition, balance, diversity, size, structure and effectiveness of their boards, and on director accountability.
One of the key areas where there is potential for family businesses to improve is in board composition. The Principles emphasise the need for a balanced and diverse board that reflects the scale and complexity of the business. They also encourage UK private businesses to define director responsibilities and accountability clearly. There are opportunities in these areas for family firms to enhance their reporting, for example, by outlining how board members are held accountable for their decisions.
Why the Wates Principles?
Family firms often have a strong sense of purpose and tend to orientate to the long term. Good governance provides them with a means of protecting the business for future generations. The adoption of the Wates Principles offers family businesses a framework to enhance their governance practices, build trust with stakeholders and secure their legacy. While challenges remain, particularly in areas such as board composition and disclosure, the Principles provide a clear pathway for improvement. With the right support to embed these Principles into their governance structures, family businesses can continue to thrive and contribute to the UK economy while demonstrating the highest standards of corporate governance.
This article appeared in the online edition of the magazine, Governance + Compliance, in November 2024.
The full report, Adoption of the Wates Principles among Family Businesses in the UK, is available to download from the FBRF website here.