On 15 February 2012, the Financial Reporting Council published a short paper called “What constitutes an explanation under comply-or-explain?” The paper reports on discussions held between senior companies and investors in December 2012 and is intended to help the UK market to further develop the effectiveness of the comply or explain aspect of the UK corporate governance regime.
The report notes that the quality of explanations could be improved in some cases, but that the overall approach to governance reporting in compliance with the UK Corporate Governance Code is very high. The report noted that there was a general recognition that explanations, and corporate governance reporting generally, should be specific to the company’s position, rather than generic or off-the-shelf. The paper indicates that a large number of companies which do not comply with one or more provisions of the Code provide a full explanation of their reasons.
Participants in the discussion indicated that a meaningful explanation should:
- set the context and background,
- provide a clear rationale which is specific to the company,
- indicate whether the deviation from the Code’s provisions is limited in time,
- state what alternative measures the company is taking to deliver on the principles set out in the code and mitigate any additional risk.
- The FRC is considering whether to reflect the outcomes of these discussions in the revised UK Corporate Governance Code on which it will consult later in the year.
View the FRC Report (10 page PDF)