FRC Publishes Paper on Its ‘Comply or Explain’ Approach to Corporate Governance

Jack Humphrey, Regulatory journalist
February 21, 2012 /

The Financial Reporting Council has taken steps to promote a better understanding of explanations under its ‘comply or explain’ approach to corporate governance in a paper published today.

The paper, which is based on discussions between senior company and investor representatives facilitated for the FRC by the London Business School, notes a very high level of compliance with the UK Corporate Governance Code.

It says that a large majority of companies who do not comply with one or more provisions of the Code provide a full explanation of their reasons. However, a minority do not and the paper is intended to help address this by setting out clearly what practitioners expect.

Key elements of an explanation identified in the discussion are that it should set out the background, provide a clear rationale which is specific to the company, indicate whether the deviation from the Code’s provisions is limited in time, and state what alternative measures the company is taking to deliver on the principles set out in the Code and mitigate any additional risk.

Participants in the discussion also felt that the starting point should be an improvement in the general quality of disclosure around corporate governance and a clear articulation by each company of how its governance arrangements support its business model.

Baroness Sarah Hogg, Chairman of the FRC, commented: “The ‘comply or explain’ approach to corporate governance has given us flexibility and enabled us to raise the standards of UK corporate governance over the years in ways that regulation cannot always achieve.

“This exercise is designed to reinforce our approach at a time when Europe has shown signs of driving towards more prescriptive regulation with a consequent diminution of shareholder rights. It should also make shareholders better equipped to push for full explanations on the relatively rare occasions when these are not forthcoming.

“We will now consider whether to incorporate the conclusions of this paper into our forthcoming consultation on revisions to the Governance Code. In the meantime we are very grateful to the London Business School for their help in facilitating the discussions and to all who participated.”

The FRC has already said it will consult on changes to the UK Corporate Governance and Stewardship Codes during the Spring.

In response to the European debate on corporate governance the FRC has been pushing in Brussels for continued recognition of the ‘comply or explain’ principles.

 

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