How RPs can learn from new corporate governance principles for private companies

First published in Social Housing, 1 July 2019.

The new ‘Wates principles’ of corporate governance for large private companies could provide a valuable framework for housing associations to follow.

At the end of last year, the Financial Reporting Council (FRC) published a set of principles for the corporate governance of large private companies.

The ‘Wates principles’ aim to help large private businesses comply with new legal obligations, which will require them to provide a statement of their corporate governance arrangements for financial years beginning on or after 1 January 2019.

However, it is not just large corporates that could benefit from the new principles. Although most not-for-profit housing associations adopt the National Housing Federation (NHF) Code of Governance, and for-profit registered providers (RPs) tend to adopt the UK Corporate Governance Code, the Wates principles could provide valuable guidance for the social housing sector.

There are six Wates principles.

1. Purpose and leadership: an effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.
2. Board composition: effective board composition requires an effective chair and a balance of backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.
3. Director responsibilities: the board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge.
4. Opportunity and risk: a board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establish oversight to identify and mitigate risks.
5. Remuneration: a board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.
6. Stakeholder relationships and engagement: Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.

Large private companies are expected to apply each of the six principles and provide a supporting statement for each, demonstrating that they understand how their corporate governance processes operate and achieve their desired outcomes. The first reporting against the Wates principles will not be seen until the middle of 2020.

How RPs can benefit

There are a number of common themes in the Wates principles that also run through the UK Corporate Governance Code and the NHF code. For example, the importance of dialogue and engagement with stakeholders is a key aspect adopted by the Wates principles.

Indeed, many large private companies would do well to follow the approach adopted by housing associations whose not-for-profit status enables them to reach out more easily to all relevant stakeholders.

However, there are other aspects that could be of benefit to housing associations:

• The “apply and explain” approach adopted by the Wates principles seeks to offer greater flexibility than the “comply or explain” approach currently adopted by the NHF code and the UK Corporate Governance Code, while maintaining transparency for stakeholders.
• Compared to the UK Corporate Governance Code, which was originally developed with large listed companies in mind, the Wates principles have been developed with large private companies in mind and their governance framework is therefore likely to resonate in particular with the increasing number of for-profit housing associations being set up as private limited companies.
• Increasingly, larger housing associations are acquiring or setting up their own trading subsidiaries, some of which may already be substantial private developers acquired through merger and acquisition activity. The Wates principles may be more appropriate for these subsidiaries, if they are required to adopt their own standalone corporate governance framework.
• The “apply and explain” reporting principle (as it applies to large private companies) will provide a helpful insight for housing associations into the practices of the large private developers or suppliers they engage with on their development programme and/or other frameworks. This reporting could be a useful source of due diligence on new joint venture partners or suppliers.

Although we are yet to see the first reporting against the Wates principles, many of the principles provide food for thought for housing associations, and the approach to be adopted by large private companies could offer valuable insight for housing associations in the development of their own corporate governance framework.

For more information, please contact James Lyons, Partner in our Banking, Governance and Corporate team