FRC to consider tougher 'comply or explain' guidelines

COMPANIES should provide a clearer explanation why they ignore  corporate governance guidelines, the Financial Reporting Council (FRC) has said.

Although the vast majority of companies that don’t comply with one or more parts of the voluntary UK corporate governance gave a full explanation for doing so, a minority did not, according to research by the UK’s accountancy and corporate governance watchdog.

Under the “comply or explain” principle a company should explain why it hasn’t adhered with the corporate governance code.

The research – based on discussions with senior company and investor representatives – also suggested companies should be encouraged to explain their governance arrangements more clearly, including how it supports business strategy.

The FRC will consider the proposals when it updates the corporate governance code, which was introduced in 2010. It has warned against imposing rigid governance rules in the UK.

Baroness Sarah Hogg, chairman of the FRC, said: “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.”

Martin Webster, head of corporate governance  at law firm Pinsent Masons, said the FRC’s guidance on the quality of the explanation where a company chooses not to comply with the code was a useful reminder that a simple statement of non-compliance is not enough.

“Brussels seems keen to intervene further in this area and to give regulators a supervisory role which the FRC, to its credit, is resisting,” he said.