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February 14, 2012

FRC promotes ‘comply or explain’ approach

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 thoroughly.

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.

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