Prologue

In 2018, drafts were published and had the potential to impact the corporate governance and
reporting duties of private companies in the future: Wates Corporate Governance Principles
and Companies (Miscellaneous Reporting) Regulations 2018 (hereinafter as “Regulations”).1
As per s.172 of Companies Act 2006 (hereinafter as “s.172 CA ‘06”2, directors have a duty to
promote success of the company. 3 While the drafts which do not intent to override the
Director’s duties laid down in s.172, this raises the question as to the type of relationship
between the principles and the codes.

To clarify the issue, the candidate will look further into the Wates Corporate Governance
Principles in conjunction with s.172 and Regulations. Since UK’s Corporate Governance Code
(hereinafter as “Code”) adopts a “comply and explain” approach, an objective evaluation will
then be made on its effectiveness by comparing with other jurisdictions. Additional
suggestions on bettering corporate governance will be submitted if necessary.

Introduction
Before going on, one must understand what corporate governance is. Cadbury Committee
and includes: “…Boards of directors are responsible for the governance of their companies...”4
Due to various corporate governance failures 5 , the Department for Business, Energy and
Industrial Strategy published the s.172 reporting guide, i.e. Regulations.6 S.172 concerns the
Director’s Duty to promote the company’s success.7 As per the Regulations, companies are
required to produce a Strategic Report and a Director’s Report. The Wates Corporate
Governance Principles has an “apply and explain” approach while the UK Governance Code
has a “comply and explain” approach.

1
Aisling Arthur, Beliz McKenzie, Jane Bondoux and Jon Reddington, ‘UK: Changes to Corporate Governance and
Reporting Obligations’ (Mondaq, 24 July 2018)
<http://www.mondaq.com/uk/x/721836/Corporate+Governance/Changes+to+corporate+governance+and+re
porting+obligations> accessed on 3 February 2020
2
Companies Act 2006 (CA 2006) s 172
3
ibid
4
Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd, The Financial Aspects of
Corporate Governance, 22
5
Remus Valsan, ‘The Wates Principles of Corporate Governance for Large Private Companies’ (ECCL Blog, 25
June 2018) <https://www.ecclblog.law.ed.ac.uk/2018/06/25/the-waters-principles-of-corporate-governance-
for-large-private-companies/> accessed 3 February 2020
6
The Companies (Miscellaneous Reporting) Regulations 2018
7
CA 2006, s 172

1
① Wates Corporate Governance Principles
Well-established businesses generate value for the stakeholders by contributing to
employment and providing goods and services.8 A clear marketing strategy is required for the
succession of the aforementioned purposes.9

However, corporate failures had called for the need of better transparency and
accountability.10 It is noted private companies do not share the same reporting obligations as
public companies. There are six disciplines laid down by Sir James Wates:

(i) Purpose and Leadership

A well-defined role or purpose will decide the company’s future direction which allows the
successful completion of short-term and long-term objectives.11 The board should weigh the
conflict of interests and attempt to achieve the aspirations.12

A detailed purpose will also ensure that the values, strategy and culture will align with said
purpose.13 The values will reflect the company’s purpose via integration into the businesses’
functions and operations.14

When it concerns leadership, the Directors should take lead on establishing transparent
policies to counter misconduct and unethical behaviour.15 To promote the aforementioned
purpose, the Directors must proactively conduct proper means of communication with the
relevant stakeholders.16

(ii) Board Composition

A promising board comprises of both an effective chair and skilful and experienced Directors
in their respective fields.17 This helps in facilitating objective thinking which leads to a better
delivery of company’s strategy. Collectively, the board must showcase a great understanding

8
Financial Reporting Council, ‘The Wates Corporate Governance Principles for Large Private Companies’ [2018]
FRC 3
9
ibid
10
ibid 4
11
Malcolm Surridge and Andrew Gilllespie, A-Levels Business (Hodder Education 2018) 29
12
Financial Reporting Council (n 8) 12
13
ibid 11
14
ibid
15
ibid 12
16
ibid
17
ibid 13

2
of the business needs and stakeholder interests. 18 Regular evaluation of its individual
directors should be conducted to highlight their performance in terms of strengths and
weaknesses.19

In accordance to Equalities Act 201020, diversity should be promoted when appointing the
board. The protected characteristics are as follows: The lack of thereof means there is no
considerable effort in establishing a balanced board in terms of expertise, diversity and
objectivity. 21 Such policy means companies should take account targets promoted by
Government and expert reviews. 22

With regard to the size of the board, it is crucial to assign the appropriate structure and size
for strategic planning and effective decision-making.23 This is dependent on the scale and
complexity of the company.24

(iii) Director Responsibilities

Corporate governance practices should be established to ensure accountability and

responsibility for effective decision-making.25 This will help in delivering long-term value for
the company. These policies include matters relating to the authority, accountability, roles of
director. It may also contain information on shareholders’ protection and agreements.26

Governance processes should be periodically reviewed to ensure they are still fit for purpose
and attempts shall be made to strengthen company governance. Identifying and managing
the conflicts of interest shall be conducted to prevent objective decision-making being
compromise. 27 Transparency will address the relationship between the company and its
owners for long term sustainable success.28 The board shall be responsible in facilitating use
of committees to consider financial, risk and remuneration matters before giving the final call.

18
ibid
19
ibid
20
Equalities Act 2010
21
ibid 13
22
ibid 13
23
ibid 14
24
ibid 13
25
Ibid 15
26
ibid
27
Ibid 16
28
ibid

3
 (iv) Opportunity and Risk

In preserving the long term value of the company, the board shall consider their valuable
sources and the stakeholders. 29 In order to achieve this, they will have to identify new
innovation and entrepreneurial opportunities. These opportunities shall be categorized
accordingly to their risks and prospects.30 The board is responsible for the risk management
in either financial or non-financial terms before making strategic decision in line with the
company’s long term purpose. 31 To realize this, the board must bear the responsibility in
developing risk management systems, establish clear communication systems and have a
review process.

(v) Remuneration

Appropriate remuneration will help securing the employees of high calibre in the company.
Such remuneration should be aligned with performance, behaviour and their contributions.32
This is to reinforce a sense of shared purpose. 33 Clear remuneration structures should be
established in line with the company’s values and purpose. Such transparency will build trust
from wider stakeholders.

(vi) Stakeholder Relationships and Engagement

Decisions of large private companies have a strong social, economic and environmental
impact on the other stakeholders.34 Hence, they have the duty to create and maintain long-
term value for them. The board should engage in communicating with the stakeholders to
understand their needs and prioritise in sustaining relationships with them. 35 Proper
feedback channels should be prepared for the stakeholders to voice their needs. This is so
that the board could provide a fair and balanced assessment of their needs before realigning
the next strategy.36

29
Ibid 17
30
ibid
31
ibid
32
ibid 19
33
ibid
34
Ibid 21
35
ibid
36
ibid

4
② Companies (Miscellaneous Reporting) Regulations 2018; “Regulations”

Previously, most private companies are not required to formally apply the corporate
governance codes however Regulations introduced several new reporting requirements
enforceable against them.37 Companies with either more than 2,000 employees or turnover
of more than £200m and a balance sheet total of more than £2b fall under the requirement.38

There are various requirements laid down under Regulations, however due to constraints, the
candidate will discuss the ones related to s.172 and corporate governance principles.

Regulation 4 obligates companies to include a statement in their strategic report describing

how Directors had regard their s.172 (1) duties. 39 Qualified companies including their
subsidiaries must comply with this reporting requirement. Realistically, the details of the
reported content depends on the structure and circumstances.40 The candidate submits that
while a degree of flexibility seems to be present, the Department for Business, Energy and
Industrial Strategy suggests companies should at least include s.172 factors, how Directors
engage with stakeholders and its effects on decision-making. 41

Regulation 13 concerns strengthening the voice of the stakeholders. 42 Regulation 13A

requires companies with more than 250 employees when preparing Director’s Report must
contain statements on arrangements that consider employees’ interests and how Directors
took account of them.43 Regulation 13B is similar to Regulation 13A but extends to include
engagement with suppliers and customers on companies that are financially stronger than
that in Regulation 13A. 44 Interestingly, there appears to be a difference in obligations
applicable to companies of various sizes, and while no reason is expressly given, the candidate
speculates conservatively that it is because the companies with a greater presence have

37
Heidi Fitchett, ‘The Companies (Miscellaneous Reporting) Regulations 2018’ (JD Supra, 1 February 2019)
<https://www.jdsupra.com/legalnews/the-companies-miscellaneous-reporting-27733/> accessed 3 February
2020
38
Department for Business, Energy and Industrial Strategy, Corporate Governance: The Companies
(Miscellaneous Reporting) Regulations 2018 Q&A, 4
39
ibid
40
ibid
41
ibid
42
ibid
43
ibid
44
ibid

5
greater societal impact. Hence, the Department intended to impose greater responsibility
upon them.

Regulation 14 provides by adhering to the aforementioned principles laid down by Sir James
Wate, large private companies will, at the same time adhere to the obligations in
Regulations.45 Further, the Regulations require companies in their directors’ report include
the type of governance code, if any, has been applied and how.46 Departure from such codes
requires an explanation and if there is no application, the company must explain why and
what are the plans for the corporate governance to be applied.47

Regulation 17 obligates companies to publish the “Pay Ratio” between CEO’s total
remuneration and average full-time equivalent employees, which do not include part-timers
and independent contractors.48 The candidate submits that with the increasing demand for
part-timers, companies may exploit this and restrict reward policy of employees. Further,
despite the various methods in calculating “Pay Ratios”, it may be useless since companies
share differing methodologies.

The candidate submits that the Regulation, by imposing disclosure duties on executive pay,
will lead to increased transparency on Director’s impact on stakeholders. Further, this will
lead to companies relying more on internal and external communications to present an
accurate data when reporting, hence engage with stakeholders more.

③ S.172 Company Act 2006

Be it the UK Corporate Governance Code or the Wates Principles that the companies decide
to adopt, these are merely factors that help guide the Companies when following s.172 CA ’06.
The section imposes on Directors a duty to promote the success of the company and affirms
Greenhalgh v Arderne Cinemas Ltd49 that a company is not separated from its shareholders.

There are 3 areas in which s.172 operates, i.e. (i) breach of duty (ii) ‘hypothetical director’ test
for derivative claim in court and (iii) reporting requirements in Strategic Report and Non-

45
ibid
46
Ibid 3
47
ibid
48
Ibid 14
49
[1946] 1 All ER 512

6
Financial Statement.50 R v HM Treasury51 held shareholders’ right under the section confines
to them able to influence board decision-making but not forced consideration of the factors.

S.172 (1) obligates Directors to focus mainly on shareholder interests; however, they are also
required to consider the stakeholder interests.52 The candidate submits that this provision
while showcase importance of stakeholders, does not explain any specific change in Director’s
duties.

Further, this provision is primarily informative and obligates Directors to be of “good faith”
when promoting success and there is no guidelines to show that they have such “regard to”
creditor interests. 53 Further, there appears to be no “objective criteria” in determining
whether Directors had been successful in performing the task.54

Under s.414 CA ’0655, an annual report must be prepared and include a balanced assessment
of the company on business, challenges and opportunities as well as indicators of Directors’
performance on their statutory duties under s.172.

Based on s.17056 that concerns the overreaching duty of directors is to promote company
success, Margaret Hodge MP praised s.172 for emphasizing primarily on shareholders’
collective interest as ‘best interests of the company’.57

However, while s.172 is praised for raising ‘best interests of the company’, it is still accused
for being “the same with modern formulation” since it is formed from soft law and not hard
law.58 The candidate submits that despite Corporate Social Responsibility had been enhanced,
the lack of enforcement when there is a breach means that Directors can still get away with
negligence in promoting company success.

50
Nina Boeger and Charlotte Villiers, Shaping the Corporate Landscape: Towards Corporate Reform and
Enterprise (1st edn, Hart Publishing) 137
51
[2009] EWHC 3020 Admin
52
Marjan Marandi Parkinson, Corporate Governance in Transition: Dealing with Financial Distress and
Insolvency in UK Companies (1st edn, 2018) 24
53
ibid
54
ibid
55
CA 2006, s 414
56
CA 2006, s 170
57
HC Official Report, SC D (Company Law Reform Bill) 13 July 2006, col 591
58
Andrew Keay, The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2013) 91

7
Further, s.172 (1) also affirms shareholders’ primary position compared to other stakeholders.
This is added by the fact that there is no locus standi for them throughout the legislation.59
This is worsened by the fact that s.178 (1) has not been codified to include any remedies and
is referred to case law.60

The company will have the locus standi to remedy the breach since Directors are obligated to
wholly in best of company interests.61 The candidate submits that this is contradictory since
it was the Directors who run the company and hence there may be lack of transparency, which
will further affect the other stakeholders.

Moreover, during a breach, s.260 provides that only shareholders can bring derivative action
which is usually hard to impose against a director.62 The fact that only shareholders have the
legal authority to do so will leave the remaining stakeholders behind.

While the provision does mention “supplier” as creditor category, other creditor interests are
absent.63 It appears that S.172 (1) hints “stakeholder value” is of less importance and there is
no real prospect of substantial change, at least in this short term.64 S.172 (1) can be set against
that in s.172 (3) where Directors can be liable for breaching their responsibility. This is where
while the company is “factually” insolvent but still operates outside the formal insolvency
regime.65

Moreover, s.172 provides that courts will not interfere with board’s decisions on a breach of
duty in promoting company success.66 This is unless the Wednesbury standard applies, where
the breach is one that a reasonable Director will not make.67 The candidate submits while this
immunity is important in ensuring Directors are not limited in efficient management of the

59
Parkinson (n 52) 24
60
CA 2006, s 178 (1)
61
Parkinson (n 52) 25
62
CA 2006, s 260
63
Parkinson (n 52) 25
64
ibid
65
ibid
66
Ernest Lim, ‘Judicial Intervention in Directors’ Decision-Making Process: Section 172 of the Companies Act
2006’ (Oxford Faculty of Law Business Law Blog, 22 February 2018) <https://www.law.ox.ac.uk/business-law-
blog/blog/2018/02/judicial-intervention-directors-decision-making-process-section-172> accessed 3 February
2020
67
Associated Provincial Pictures Houses Ltd v Wednesbury Corp [1948] 1 KB 223

8
company, it may hinder transparency in reporting attempts since judiciary is limited in power
here.

The Business and Enterprise Select Committee of House of Commons published a report on
corporate governance. 68 It debated on the need of “employee” representatives in the
board.69 However, while no conclusive answer was given, it raises significant technical issues
such as to whom such representatives will owe such duties and that many employees are self-
employed, legislation is still needed in that area.70

④ Effectiveness of UK Governance Code; “Code”

UK Governance Code is one of the codes applicable by the companies when adhering to the
requirements of Regulations. The Code operates via a “comply or explain” approach.71 There
are various provisions laid down across several matters, namely: (i) Board Leadership and
Company Purpose, (ii) Division of Responsibilities, (iii) Composition, Succession and
Evaluation, (iv) Audit, Risk and Internal Control and (v) Remuneration.72

With regard to its effectiveness, the Financial Reporting Council stated out of 288 companies
reviewed, only one failed to comply with any of the nine provisions.73 Some companies did
not even submit reasons on failure to comply with the code.74 The candidate submits that the
companies did not consider properly the importance of culture, strategy as well as the views
of the stakeholders.

Moreover, many outlets had criticized the Code for having a tick box mentality. 75 76

Companies only concentrate on adhering to the strict compliance of Provisions.77 Maureen

68
HC Business and Enterprise Select Committee 4 April 2017, vol 702
69
ibid
70
ibid
71
Financial Reporting Council, ‘The UK Corporate Governance Code’ [2018] FRC
72
Ibid 1
73
Department for Business, Energy and Industrial Strategy, Corporate Governance Reform: The Government
Response to the Green Paper Consultation 10
74
ibid
75
Sara White, ‘FRC Criticises Tick Box Mentality to Corporate Governance Code’ (Accountancy Daily, 9 January
2020) <https://www.accountancydaily.co/frc-criticises-tick-box-mentality-corporate-governance-code>
accessed 3 February 2020
76
James Booth, ‘Watchdog Calls for End to Tick-Box Approach to Corporate Governance’ (City A.M., 9 January
2020) <https://www.cityam.com/watchdog-calls-for-end-to-tick-box-approach-to-corporate-governance/>
accessed 3 February 2020
77
Financial Reporting Council, ‘Annual review of the UK Corporate Governance Code’ [2020] FRC

9
Beresford stated that the Code lacks a holistic approach to corporate governance. 78
Companies often view it as a long-term approach to governance rather than confirming their
adherence to the Provisions.79 The candidate submits that such empty talk by companies
severely undermines the interests of stakeholders. Such an act compromises corporate
governance and reporting aspect that the Code aims to achieve.

The Financial Reporting Council was facing pressure since the unexpected fall of Carillion
PLC.80 Ex-Prime Minister had also vowed to put an end to corporate misbehaviour.81 However,
based on the above discussion, the candidate submits that Financial Reporting Council still
have a lot of improvements when it comes to the Code.

⑤ Corporate Governance in Other Jurisdictions

Countries outside of UK also practice corporate governance, however the methods do differ
from one jurisdiction to another. The candidate will compare the practices adopted by each
jurisdiction with that of UK’s.

(i) Germany
Germany adopts a two-tier system, where public companies consist of a management board
which ensures effective running of company operations, and a supervisory board which
appoints, guides and monitors the management board. 82 While supervisory board does not
directly run the company, certain decisions require their consent.83 Further, the supervisory
board has an exclusive function of reviewing the company’s financial records and annual
reports.84 There was no express reason as to why Germany adopted the dual board structure
since its adoption post Second World War, however academics commented that it was based
on the “mixture of economic, political and cultural factors” in Germany.85

78
Booth (n 76)
79
ibid
80
Nina Trentmann, ‘New UK Governance Code Focuses on Reporting, Executive Remuneration’ (The Wall
Street Journal, 16 July 2018) <https://blogs.wsj.com/cfo/2018/07/16/new-u-k-governance-code-focuses-on-
reporting-executive-remuneration/> accessed 3 February 2020
81
ibid
82
Meredith Paynter, ‘Analysis of Australian Corporate Governance for the Business Council of Australia’ (King
& Wood Mallesons, 30 January 2019) page 38
<https://d3n8a8pro7vhmx.cloudfront.net/bca/pages/4526/attachments/original/1548911501/40600620%281
%29_Misc_-_Business_Council_of_Australia_-_Analysis_of_Corporate....pdf?1548911501> accessed 3
February 2020
83
ibid
84
ibid
85
ibid

10
 (ii) Hong Kong
Hong Kong hosts a huge network of offshore financial centres, and helps launder money
obtained unfairly. 86 Following the scandal that is Panama Papers, Bryane Michael submitted
that despite other financial centres offering low taxes and highly regulated anti-money
laundering laws, poor corporate governance had facilitated the use of shell companies to
siphon money away from the corporations. 87 Academicians concluded these offshore
companies tend to undermine the quality of corporate governance. 88 Further, the lacking
amount of disputes brought to courts mean that Hong Kong jurisprudence could not develop
corporate governance principles on the same level as UK.89 The candidate submits that Hong
Kong is in dire need of a new administrative law, specifically on corporate governance aspect.

⑥ Recommendations
There are several recommendations that can be implemented to help raise corporate
governance in the UK.

(i) Regulation

The candidate submits that while the distinction in Regulation 13 can be justified, it should be
implemented across all companies of various sizes to ensure a more efficient and transparent
board.

(ii) S.172 CA ‘06

First is the codification of s.172’s principle of “enlightened shareholder value”.90 Directors are
to act in a way that promotes the success of the company with regard to a series of factors.
There is no definitive list to the factors and its scope has been expressly broadened. However,
the obligation placed is to merely ‘have regard to’ such factors is questionable since it does

86
Bryane Michael, ‘What do the Panama Papers Teach Us About the Administrative Law of Corporate
Governance Reform in Hong Kong?’ (2018) , 7
<https://www.researchgate.net/publication/322570061_What_Do_the_Panama_Papers_Teach_Us_About_th
e_Administrative_Law_of_Corporate_Governance_Reform_in_Hong_Kong> accessed 3 February 2020
87
ibid
88
Say Hak Goo, ‘The Role of Hong Kong’s Financial Regulations in Improving Corporate Governance Standards
in China: Lessons from the Panama Papers for Hong Kong’ (10 March 2017) University of Hong Kong Faculty of
Law Research Paper No. 2016/048, 57 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2914865>
accessed 3 February 2020
89
Michael (n 86) 9
90
Paynter (n 82)

11
not require directors to do anything beyond consideration.91 This is unlike Australia which
imposes a stricter burden on directors.

Secondly, an objective test shall be laid to rate the performance of Directors. Ernest Lim
pointed out that a ‘Heightened Review’ should be implemented where courts are allowed and
obligated to consider factors such as whether the Board possess the relevant expertise for
the decision and whether enough resources had been committed to the matter. 92 The
candidate submits that while this puts greater pressure on the Board when decision-making,
the social benefit eventually overcome the reduced confidentiality in the Board.

(iii) Code

Georgina Tsagas suggested the use of alternative methods that could advance a democratic
mean of corporate decision-making. 93 The Code should add a provision that there
stakeholders are on mutual understanding of company objectives.94 It must be satisfactory
and must have regard to s.172 (1) factors.95 This aligns with UN Principles for Responsible
Investment’s ‘Environmental, Social and Governance’ concept, allowing shareholders to
better assess the risks after extra financial information was disclosed.96

Conclusion
Based on the previous discussions, the candidate concludes the question is correct in that the
principles do not override s.172 and instead shares a complementary relationship. Both are
crucial in promoting long-term success and the principles are mere guidelines.

However, upon further dissection, the candidate would like to highlight that there is a greater
issue here, which is enforcement. Undoubtedly, it appears while s.172 CA ‘06 provides the
illusion that corporate governance will be greatly improved, it is certainly far from the case.
The reality is that there is still no legal cure for breach, hence rendering the section

91
ibid
92
Lim (n 66)
93
Georgina Tsagas, ‘Section 172 of the Companies Act 2006: Desperate times call for soft law measures’ (2017)
Draft Paper for contribution: Tsagas, G, 2017, ‘Section 172 of the Companies Act 2006: Desperate Times Call
for Soft Law Measures’ in Nina Boerger and Charlotte Villiers (eds.) Shaping the Corporate Landscape Hart
Publications, Forthcoming, 10 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2996090> accessed 3
February 2020
94
ibid
95
ibid
96
Principles for Responsible Investment, ‘What is the PRI’s Mission’ (Principles for Responsible Investment)
<https://www.unpri.org/pri> accessed 3 February 2020

12
controversial is due to the lack of adequate protection as per reports by Financial Reporting
Council and various academicians. Corporate governance being the essential element to a
healthy corporate culture and confidence in UK business.

13