FRC to look into tougher comply or explain policy
THE FINANCIAL Reporting Council (FRC) has issued research suggesting companies should provide greater detail when they choose to exempt themselves from corporate governance procedures.
The regulator, which has responsibility for promoting the UK Corporate Governance Code, will now consider the proposals as part of an ongoing process to revise its guidelines.
The research noted that the vast majority of UK companies abide by all the provisions in the Code but noted a small number of firms who provided inadequate justifications for ignoring certain clauses.
Under the “comply or explain” rule, if a company fails to meet a provision of the code then it must explain the reasons for this decision.
But the report said that some of these justifications “can come across as an assertion of difference rather than a full explanation of why the company in question has chosen to deviate from agreed best practice”.
By defining a “substantive explanation” and increasing pressure on companies to follow suit the FRC hopes to avoid the need to introduce additional regulation.
Baroness Sarah Hogg, chair 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.”
The Code came into force during 2010 but Britain’s light-touch approach to governance regulation faces reform as part of European Commission proposals.