In February 2012, the Financial Reporting Council
("FRC") published a report of
discussions between companies and investors on what constitutes an
explanation under the comply or explain approach in the UK
Corporate Governance Code. In light of the debate in Europe about
the future of comply or explain and whether there should be more
prescriptive regulation, the FRC concluded that it would be
appropriate to address the question of what constitutes a
meaningful explanation under comply or explain in order to
promote explanations that are full enough to meet the needs of
The FRC has pulled together a number of conclusions from the
discussions, including that:
The starting point should be an improvement in the general
quality of disclosure in relation to corporate governance and a
clear explanation by each company as to how its corporate
governance arrangements support its business model;
The chairman could play an important part in this and the
chairman's statements could be fuller than they are currently
in relation to corporate governance. More specifically, insights
into how key features of leadership and board effectiveness are
achieved in practice could be included in the chairman's
Companies that provide a clear explanation of their approach to
corporate governance could find that shareholders are more prepared
to accept their explanation if they choose to deviate from a
particular provision of the Code.
The report looks at the context of explanations, what elements
are needed for a meaningful explanation and obstacles to greater
disclosure. The key elements for a meaningful explanation are that
Set the context and historical background;
Provide a convincing rationale for the deviation that is
specific to the company, ensuring the explanations are
understandable as well as persuasive;
State what mitigating action the company is taking to maintain
conformity with the relevant principle of the Code and to address
any additional risk; and
Indicate whether the deviation from the Code's provisions
was limited in time and when the company intends to return to
conformity with the Code's provisions.
The FRC is considering whether to reflect the conclusions of
these discussions in the revised UK Corporate Governance Code on
which it is intending to consult later in 2012.
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