The Financial Reporting Council (FRC) has published a report which aims to promote a better understanding of explanations given under the "comply or explain" requirement in the Listing Rules as regards the UK Corporate Governance Code - click here.
In light of the European Commission's recent Green Paper on Corporate Governance and, in particular, the debate around the future of "comply or explain", the FRC has published a report of discussions it has held with companies and investors on the question of what constitutes an explanation. Its purpose in doing so is to reinforce this approach to corporate governance which it believes to be more effective than potentially more prescriptive alternatives.
The report concludes that a meaningful and effective explanation should:
- include background and context against which the explanation can be easily understood;
- provide a clear and specific reason for the deviation from the Code that is relevant to the company in question;
- include any mitigating steps taken to address additional risks associated with the course of action taken; and
- state whether the deviation from the Code is limited in time and when the company intends to comply, rather than explain.
The FRC also notes that companies that clearly disclose their corporate governance arrangements and how those arrangements underpin their business model may find that shareholders are more willing to accept any explanations of deviation from the Code. Companies that are currently drafting their corporate governance statements may choose to consider the FRC's conclusion. The FRC is considering whether to formalise its conclusions in the next version of the Code which will be consulted on and implemented later in 2012.
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