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Mishcon Academy: Digital Sessions – Corporate Governance in family business - Insights from Sir James Wates CBE

Posted on 20 May 2021

On 4 May 2021, we were honoured to host Sir James Wates, CBE at our Mishcon Academy Digital Session on Corporate Governance in family businesses.  Sir James is chairman of the Wates Group – a leading UK construction, property services and residential group, now in its fourth generation of family ownership and has held numerous prestigious positions through which he has championed business as a force for good in society.  Sir James is also chairman of the Institute for Family Business and, in January 2018, was appointed by the Government to be chairman of the coalition group developing corporate governance principles for large private companies (the so-called "Wates Principles").   

Interviewed by Kate Higgins, legal director in our Corporate Department, Sir James explained the genesis, scope and application of the six Wates Principles through the genius of the "Wates Pyramid", and treated us to some generous insights into using them in practice to 'look in the mirror', adjust and gain competitive advantage.  We explored the 'North Star' (and 'shining light') of purpose and leadership including how the Wates group have defined their own purpose in practice with the values that underpin it, noting that the family and business values are 'inextricably intertwined'.  We were taken on the fascinating journey travelled by the Wates family business as it has transitioned through different generations and governance structures, stopping along the way to explore the resources and travel companions which have enabled them to meet the journey's inevitable risks and challenges.  We explored the role of reporting and stakeholder engagement, devising sound board and incentive structures, ensuring that audit and risk teams 'lift the drain covers' and the role of spending sufficient time and resource on looking at opportunity - in particular to ensure you hand to the next generation the sustainable business "that they want (and not what you want to give them)".  We discussed the Wates Group's ambitious 2025 diversity and waste, energy and nature targets and Sir James counselled us not to fear to 'reach for the stars and get to the moon'.

Laura Chandler, partner and head of the Corporate Division at Mishcon, reflecting on the event, commented that "Governance is not a new topic. However, it has historically been measured against requirements set out in statute and regulations or codes written only for quoted companies.  The Wates Principles give private companies the opportunity to really look at their governance and how governance principles can assist in the development and growth of business. We are increasingly seeing that successful businesses are getting on board with wider governance principles and see them as a force for good and not just additional red tape.  Whilst the Wates Principles are not only applicable to family businesses, they are, off course, very poignant to family businesses and, as statistics from the Institute for Family Business indicate that in the UK over 87% of business (some 5 million) are family businesses generating almost a third of the UK's GDP, those family businesses and their governance are incredibly important to the UK economy."


Q&A Highlights

Sir James, taking you back in time, can you explain how you became involved in the coalition group which was asked by the Government in January 2018 to draft a code for private companies to report on?

It actually started before that and when the Government of the day announced it would get involved in taking some control over private business governance. I was approached by Elizabeth Bagger, the Director General of the Institute for Family Business and I accepted the invitation from Greg Clarke, business minister at the time to chair the group.  The group was a varied and enthusiastic involving the CBI, Institute for Family Business, Institute of Directors, private equity, unions and various other stakeholders. We started to have some very good discussions and my starting point was to avoid heavy, burdensome regulation, but produce something people would aspire to.  Very early on we came up with the concept of general principles people could 'apply and explain' rather than a stricter code to be 'complied with or explained against'.  We wanted to allow statements to be positive.

Which private companies are in scope for publishing a corporate governance statement?

We went on the journey without knowing what the definition of a large private company was.  When guidance came from BEIS – it was to be businesses with either: over 2,000 employees; or with both a turnover of more than £200 million and a balance sheet of more than £2 billion.  According to the Financial Reporting Council we understand about 1,900 companies are in scope now.  However, we hoped the principles would have a wider application than that.  Our aim was that people would see the principles as a useful tool, to look at themselves in the mirror – to measure themselves against certain criteria and to look at their peers and their competitors.  Ultimately, I believe that if you do this well, and demonstrate you are doing it, you gain a competitive advantage. Your employees, customers and suppliers will trust you more.

Could you briefly outline the six principles using the 'genius' of the Wates Pyramid?

Right at the top – the so-called "North Star" is purpose and leadership:  What is the company for? What is its purpose?  Is it there purely to make money, or is it there (in our business) to create great buildings, create homes for people, create offices.  If you get it right, that then becomes your guiding light.  Alongside that, you then need strong leadership to lead everyone to that purpose.  The rest of Governance sits underneath that.  You need to have a strong and balanced board (principle 2) – no two boards or companies are the same.  In our business we've had non-executive directors for as long as I can remember. In my father's generation we always had a NED to give 'wise counsel' and help them overcome challenges.  Our board is balanced – we have five family members, three executive directors and three non-executives – so the weight of voting is with those who are not the owners.  Alongside that, strong director responsibility (principle 3) is important – make sure directors know their duties – one of the things that came out of the process was that a lot of directors in family business become directors without knowing what their responsibilities are.  The fourth principle is about risk - we considered that too often there is emphasis on risk and we all have 'risk committees', but actually we are not looking for opportunity enough and we wanted to raise the bar.  Remuneration (principle 5) is something you cannot ignore – it is the headline that any business must focus on because it is about individual reward and motivation.  We felt that it is important that remuneration is considered in the round to incentivise talent but be mindful of the sector and the environment – it would be crazy, for example, for a low margin business to be paying high variable pay.  Finally, and the most important principle (other than the North Star) is principle 6 - stakeholder relationships and engagement. If you don't get that right, what chance of you got of having a sustainable business?  What effect does what you do have on your customers and your employees? You have to talk to them, understand their concerns and address them.

Taking the 'North Star', how do you define and articulate a corporate purpose and the values that underpin them and how far should they align with the family's values?

I strongly believe that the family values are inextricably intertwined with the business values.  If I reflect back over the Wates family business over four generations (I am the fourth), each generation has always looked to improve the way we do things, to look for a better way.  Our Wates Guiding Framework of 'Creating Tomorrow Together" articulates our purpose: "Together we inspire better ways of creating the places, communities and businesses of tomorrow". Although it's our north star, it’s at the bottom of the triangle which our business uses to illustrate our framework as it is the foundation of our (construction) business.  Alongside, we have goals to be 'sustainable, trusted and progressive".  Our behaviours are our values and align with those of the family – they are that 'we care, we are fair, and we look for a better way'.  Each generation has done that.  The executive came up with the values (after consultation with stakeholders including employees and the market), knowing the family's values. 

Looking at board structure, what tips do you have for a family company as it grows and transitions to future generations to ensure the board remains effective and diverse?

Let's be very clear that the family, the owners, do not have a monopoly on good ideas. If you want to be better, you want to get more ideas coming into the company.  It is sensible to look at where your skill sets are as a board, look at where you might be missing things and look to bolster that either with executive or non-executive appointments.  Have someone to challenge you on the direction you are swimming in and the colour of the water.  One of the things we find through the Institute for Family Business, is that the biggest challenge that most family businesses face is succession planning.  The most difficult transition is the first to second generation, when the founder is maybe reluctant to hand on the reins.  The second generation (generally) will take the business forward very strongly.  History shows – and it's a bit of an over-simplification and didn't happen in the Wates business - that the third generation will enjoy the playboy lifestyle, take their eye off the ball and the business starts to go backwards. When we started really looking at succession in my generation we talked to other businesses through the Institute for Family Business and that started to shape transition to the next generation.  We have put in place a programme to help those who are best equipped and have a desire to work in the business to do so.  Of course, you must also make sure that what you are handing on is what the next generation wants rather than what you want to give them.  We are working with the executive team to ensure the next generation are given the best opportunity to succeed, but also given the right level of challenge – success is not a given just because your name is above the door.  There are many areas to go to get support for succession planning – don't be shy of asking for help.  

Given the government's current consultation on restoring trust in audit* and criticisms of auditors being too close to those they audit, I see that, although not required to (like listed companies), you have been rotating your auditors?

*Significant audit and corporate governance reform on the horizon

Yes, until 20 years ago we'd had the same auditors for probably 50 years.  They were very good when we were a tighter controlled, smaller business.  When we went outside for our CEO for the first time, we felt we needed to up our game.  There is a house style and emphasis on what each firm of auditors focus on, based, for example, on the sectors they operate in.  If you bring in a new firm with new partner, a change of focus and change of emphasis, it's no bad thing – they'll be asking the questions and lifting the drain covers.

Looking to the future, let's dig deeper into opportunity and risk and the role of targets in creating a sustainable business for future generations.  I see that the Wates corporate governance report for 2019* references some challenging targets for 2025 in relation to diversity & inclusion and the environment?

*Wates corporate governance report for 2019

We are being quite bold but are not unique in our sector.  You can afford to be bolder in a private business, as you are not going to be judged by markets if you set a target but for good reason don't quite achieve it. For example, our view is that to get best access to best workforce, we have to be more diverse.  We want to attract people from right across the social spectrum - Our female rate was just over 20% for the period reported but we want to it to be 40% by 2025 - it’s a challenge in our sector.  We have to be fishing in a much bigger talent pool, it is very limited – so we want to reach out across all, be it gender, BAME, disability, LGBTQ+ - we recognise that we need to reach for the stars and get to the moon. 

 

Kate Higgins

Okay, welcome everyone.  I’m Kate Higgins, a Legal Director in the Corporate Department at Mishcon de Reya and I’m your chair host for today’s session on Corporate Governance in Family Business.   A huge welcome to Sir James Wates CBE.  James is chair of the Wates Group, a leading UK family-owned construction property services and residential group of companies and I’m not going to spare his blushes by giving you a few details of his bio.  Probably most relevant to today, in January 2018, Sir James was appointed by the Government to be the Chairman of the Coalition group responsible for developing some Corporate Governance, a code for private companies, the so-called ‘Wates Principles’.  In 2012 Sir James, you were awarded the CBE and in 2019 knighted for services to business and to charity.  So, welcome. 

Can I take you back in time to 2018, January 2018?  We had had the collapse of BHS which of course was a large privately-owned business and Corillian had just gone into liquidation and the Government asked you to get involved.  It was introducing a comply or explain rule, requirement for large private businesses and suggested developing a code for private companies and they asked you to become involved.  Could you tell us a little bit about that?

Sir James Wates

It actually started before that.  So, when the Government of the day announced that they were going to get involved in trying to get some control over private businesses, I was horrified.  I was then approached by Elizabeth Bagger who was, who is the Director of the IFB at the time and said, “Look, this coalition group’s been put together and it’s been suggested you might like to chair it.”  We started having very good discussions about what we needed to do and my starting point was not heavy burns and regulation but something that would… people would aspire to and very early on we came up with the concept of applying and explaining rather than complying.  Rather than say, “We’re not doing it because…” because that would have been negative.  We wanted to be much more positive about the way we went around it. 

Kate Higgins

And so it was only the very largest companies who were required by law, of course, to actually include a Corporate Governance Statement in their reports?

Sir James Wates

Yes it was.  I mean, we went on the journey without really knowing what the definition of a large private company was.  We eventually got some guidance from Bayes – the Business Department at the time – as to what the guidelines were and it was, it was a company that employed more than 2,000 people or had a balance sheet of £2 billion and turnover of £200 million and it captured at the time, about 1,200 companies. 

Kate Higgins

I think in the introduction to the Wates Principles, once they were published, you said you hoped that other large private businesses or other private businesses would use it as a bit of a blueprint, that they would also engage with it. 

Sir James Wates

Yeah, we did because again we thought, “Why do we want to do this?” Do we want to do it just so people tick the box and say, “Well we’ve complied,” or do we want people to actually see this as a useful tool?  So, a tool that people can take to look at themselves in the mirror; to measure themselves against certain criteria, “Do we do this? Do we do that?”  To actually then look at their peers, their competitors, do they do it?  Because ultimately I believe that if you do this well and you demonstrate you’re doing it, actually you can 03:47 competitor’s advantage. 

Kate Higgins

What I love about it, so you’ve got so many principles in the UK Corporate Governance Code in all its glory and gold plated standards but what you’ve done is distil it down to six core principles and I love the genius of the ‘Wates Triangle’ so are you happy just to talk through some of the principles?

Sir James Wates

Sure.  So right at the top, the so-called ‘North Star’ is purpose and leadership and we felt that that was very important.  So, what is the company for?  What is its purpose?  Is it there purely to make money?  Is it there to, in our business, create great buildings, create homes for people, create offices?  When you get that in place, that becomes your guiding light.  Alongside purpose, you’ve got to have strong leadership because if you set out your purpose, you’ve then got to lead everybody in the business to that purpose.  Underneath that, we felt that there is the governance that you need to have in place.  You need to have a strong board, a balanced board.  Alongside that, one of the things that came out when the coalition group was working was a lot of directors in family businesses particularly, become directors without knowing what their responsibilities are.  The fourth area we looked at, the fourth principle, was opportunity and risk and we were very keen about the emphasis on opportunity because our view was that too often there’s focus on risk.  We all have risk committees.  But actually we’re not looking for opportunity enough, so we were very keen that we raise the bar for people to think about opportunity and say, “So, what does this opportunity create for us?”  Just before we came online you and I were talking about remuneration and it’s something you cannot ignore.  It is the headline thing that any business, there’s focus on it.  And finally and I think the most important principle, almost – other than the North Star – was stakeholder relationships and engagement.  Because if you don’t get that right then what chance have you got of having a sustainable business?

Kate Higgins

So, let’s look in more detail at purpose and values.  How do you go about setting your corporate purpose and aligning your culture and your values?  Does the corporate purpose need to be aligned with the family values or are they completely separate?

Sir James Wates

I think they’re inextricably intertwined.  I think if I reflect back on the Wates family over the last four generations which I’m fourth, actually each generation has always looked to improve the business; to improve the way we do things; to look for a better way.  So, I actually firmly believe that the family values are very, very strongly intertwined with the business values. 

Kate Higgins

Perhaps some of the businesses that we might have in attendance today who perhaps are at a… maybe haven’t been in existence already for five generations but might be thinking about the challenges for a family company and board structure as it grows.  What tips could you give for that kind of a journey and how a board can ensure that it remains effective and diverse?

Sir James Wates

Let’s be very clear that the family or the owner, the founder owners, the family etcetera do not have a monopoly on good ideas and if you want to be better, you want to get more ideas coming into the company.  So, I would say it is sensible to look at where your skillsets are as a board, to look where you might be missing things and then to look to bolster that through either executive appointments or non-executive appointments. 

Kate Higgins

And how do you go about getting the next generation involved in the business?

Sir James Wates

The biggest challenge that most family businesses face is succession planning.  The most difficult is probably first to second generation when the founder is maybe reluctant to hand on the reins to the next generation.  Having done that, you’ve then got the next generation who generally will take a business forward very strongly.  History shows that the third generation are the ones who enjoy – over-simplification – the playboy lifestyle, take their eye off the ball and the business starts to go backwards.  And we started really I suppose, looking at succession from my generation, how do you transition from one generation to the next?  How do you make sure that what you’re handing on is something that the next generation wants rather than what you want to give them?  How do you really bring on… how do you make sure that you’ve got the right next generation members in the business?  We are working with the executive team at the moment to ensure that these next generations are given the best opportunity to succeed but also given the right level of challenge because it is not a given because your name happens to be above the door.  So, there are many, many areas to go to get support for succession planning and I would say, don’t be shy about asking for help. 

Kate Higgins

I’d like to perhaps dig a little deeper into change and the way the world is changing and how we ensure our business is sustainable.  I think that’s key with principle four on opportunity and risk, so you know again, having read your Corporate Governance Report for the Wates Group, there’s some fantastically challenging targets in there relating to both diversity and inclusion on the social side so, I wonder if you could talk a little bit around that and risk and opportunity and target setting and how that works?

Sir James Wates

Maybe there’s something about being a private business, you can afford to be bolder.  You’re not going to be judged by the markets.  Your share price is not going to go down because you’re made this statement or you don’t, you fall short of it.  Our view is that to get the best access to the most talented workforce, we have to be more diverse. 

Kate Higgins

There’s certain things in relation to corporate collapse that we’ve seen over the years and the board will turn around and say, “We just didn’t know.  We didn’t know that our suppliers were being treated badly or we didn’t know…this.” I don’t know if you’ve got any sort of pearls of wisdom on that front. 

Sir James Wates

I think the most important thing is getting the board reporting right so that the board is looking at the right things.  Actually having a really good audit committee who will lift the drain covers on an occasional basis and they’ll just dive down and have a look at a particular thing.  Because if something doesn’t feel right, that comes from intuition, comes from experience, comes from being in and around the business. 

Kate Higgins

And it’s an interesting thing isn’t it at the moment that the consultation that’s out there from the Government relates to audit and trust.  You mentioned the Audit Committee and you’ve mentioned the responsibilities that the board have and those are very important obviously.  But society has the right for a cross-check against that and so we see the recent consultation and we know that quoted companies often rotate their auditors, indeed they’re required to every 10 years.  I was very interested to see in your report that that was an approach that you’d taken voluntarily as well in the business. 

Sir James Wates

Until 20 years ago, we’d had the same auditors for probably 50 years.  A small, west-end, boutique firm who the family were very close to and they were very good and… but actually, they were very good when we were a tighter-controlled smaller business.  When we actually went outside for our executive management, our CEO, the first time, we felt we needed to up our game as a family.  And auditing is auditing, yes of course it is, but there is a house style and emphasis and it’ll come from the audit partner and his experience of other companies that he’s auditing or working with in the sector, around the things that they focus on.  And I think if you bring in a new firm with a new partner, there’ll be change of focus and change of emphasis and that’s no bad thing from an audit perspective.  Just lifting the drain covers, seeing what’s going on, asking the questions. 

Kate Higgins

So, we have a question that’s come in.  I’ll read it out.  “The virtues of the by-now very much watered down ESG principles, address the cost of capital.  A well-run business will have a lower cost of capital in the long-run.  Would you think this applies to the Wates Principles as well in a private company context?”

Sir James Wates

The answer’s yes, I would hope so.  I would hope that because you know, the Wates Principles are all about a better business being done better, that should impact on the cost of capital. 

Kate Higgins

And then a second question that we’ve got is, “Would you think that despite all commitments to meritocracy, the family members will win or be preferred, at the end of the day?”

Sir James Wates

I would hope that you would never get a family member who is over-promoted because if you end up doing that you’ll then get – potentially you’ll get largely led by donkeys.  So, you need family members to be able to hold their own with their peer group.  Ideally, you want them to be able to step forward and advance and progress but I think there is a natural competence that people will reach. Now, that doesn’t then impact on their ownership of the business because that is separate to an executive position.  So, I would be concerned if family members were in a position because their name was Wates in our business and they were patently not as good at the job as the people alongside them. 

Kate Higgins

I think we’re almost out of time now but we’ll take one final question.  “How do you promote productive conflict in your executive team?”

Sir James Yates

That’s an interesting one.  And I suppose it happens naturally to be honest.  Because our executive team is made up of our CEO and our CFO plus the support functions.  So, HR, Commercial.  And then alongside that we’ve got our sort of five key business leaders who by their very nature are competitive and there will be a lot of competitive tension between them, which is good.  Because they each want their business to be the one that gets the pat on the back at the end of the year from the family, “You’ve done well this year.” We’re not like that at all, by the way.  The whole productivity thing has been really interesting.  The impact on our productivity through Covid and which businesses have recovered quicker.  Some businesses have actually become more efficient with less people because they’ve changed the way they’ve done things.  Others have said, “We can’t quite change, it’s a bit more difficult,” but having seen others do it, it raises the game.  So, they feed off each other and that, I suppose, is where it comes from. 

Kate Higgins

Thank you so much for your time today, it’s been an absolute pleasure speaking with you and I’m sure we’ll all benefit from what you’ve had to say and yes, let’s keep the drive to make business a force for good in society.  Thank you so much. 

The Mishcon Academy Digital Sessions.  To access advice for businesses that is regularly updated, please visit mishcon.com. 

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