The Financial Reporting Council (FRC) has
published a paper to promote a wider adherence to the ‘comply or
explain’ approach to corporate governance.

This approach requires companies who do not
comply with the provisions of the UK Corporate Governance Code to
provide a full explanation of their reason for not doing so.

The paper, based on discussion between senior
company and investor representatives, stresses that a large
majority of companies who do not comply with one or more provisions
of the Code, do provide the alternative explanation.

The aim of the paper is to promote a better
understanding of explanations under the ‘comply or explain’
approach among the minority of companies that do not follow it

Participants in the discussion said 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.

FRC chairman baroness Sara Hogg said the
‘comply or explain’ approach has given flexibility to companies and
enabled the FRC to raise standards 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,” Hogg said.

The FRC will also consider whether to
incorporate the conclusions the paper into its forthcoming
consultation on revisions to the Governance Code.