FRC's paper on its comply-or-explain approach to corporate governance

15 February 2012

The FRC has taken steps to promote a better understanding of explanations under its comply-or-explain approach to corporate governance, in its report of discussions between companies and investors entitled: 'What constitutes an explanation under comply-or-explain?'

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 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 does 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;
• 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.

Press release

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