UK executive remuneration structures are to take into account pay and conditions elsewhere in the company from 2019, after the Financial Reporting Council (FRC) published its updated corporate governance code for large companies, the Wates Principles.
The new code applies to companies with either more than 2,000 or a turnover of over £200m along with a balance sheet of over £2bn.
In its introduction of the Principles, the FRC pointed to several large-scale corporate failures which have drawn the public’s attention to the need for improved transparency and accountably, and also highlighted risks to wider stakeholders.
It is made up of six principles, which are:
- 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.
- Board Composition – Effective board composition requires an effective chair and a balance of skills, 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.
- Board 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.
- Opportunity and Risk – A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value and establishing oversight for the identification and mitigation of risks.
- 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.
- 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.
These principles are broadly similar to the principles put forward by the FRC in its consultation, held between June and September.
James Wates, chairman of Wates Group, said: “I believe that good business, well done, is a force for good in society. The Wates Corporate Governance Principles are a tool for large private companies that helps them look themselves in the mirror, to see where they’ve done well, and where they can raise their corporate governance standards to a higher level. Good corporate governance is not about box-ticking It can only be achieved if companies think seriously about why they exist and how they deliver on their purpose then explain – in their own words – how they go about implementing the principles. That’s the sort of transparency that can build the trust of stakeholders and the general public.”
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Reporting against these principles will take effect on 1 January 2019