New Guidance on Improving the Quality of “Comply or Explain” Reporting
The FRC has published new guidance on improving the quality of “comply or explain” reporting when departing from provisions of the 2018 UK Corporate Governance Code (the “Code”), stating that “companies and shareholders should not favour strict compliance over effective governance and transparency” and that “explanations are key to the ‘comply or explain’ nature of the Code”.
Following a recent review of corporate governance reporting, the FRC found that too many companies strive to declare strict compliance with the Code and that such a formulaic approach leads to boilerplate language and ineffective reporting that lacks substance and information about governance outcomes. The FRC encourages companies to embrace the flexibility offered by the Code through its “comply or explain” approach, which is designed to encourage companies to develop governance processes and practices that are the most suitable for their particular circumstances and to report them in a meaningful way.
Companies are encouraged to consider their individual circumstances carefully and choose what is best for them, while ensuring they provide full, clear and meaningful explanations for departures from the Code. A good explanation should demonstrate that departure is justified given the company’s specific circumstances, and should:
- set the context and background;
- give a convincing rationale for the approach being taken;
- consider any risks and describe any mitigating actions; and
- set out a timescale within which the company will comply.
Companies and shareholders should not favour strict compliance over effective governance and transparency.