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FRC to look at quality of explanations in ‘comply or explain’ section

01 May 2015

FRC to look at quality of explanations in ‘comply or explain’ section - read more

The Financial Reporting Council is to look at the quality of explanations provided by companies that choose not to comply with UK Corporate Governance Code in the ‘comply and explain’ section.

FRC Chairman Sir Winfried Bischoff, speaking at the Grant Thornton Governance Dinner, highlighted the FRC’s plan: ‘I would like to remind both companies and investors that simply complying without giving due consideration to what is appropriate and relevant reduces the flexibility that this approach aims to achieve. To this end, further work will be conducted during the rest of this year to monitor companies’ explanations when they are not compliant with the Code.

‘The “comply or explain” principle gives companies flexibility and makes it possible to set more demanding standards than hard rules. Requiring companies to report to shareholders rather than regulators means that an assessment about whether a company's governance is adequate is taken by those in whose interest the Board is meant to act.

‘The UK’s strong governance culture encourages companies to list in London. One of the principle reasons why the UK Corporate Governance Code has been such a success is that it operates on a principles basis rather than relying on strict regulation to bring about improved governance.’

Other areas that Bischoff focused on include the viability statement, diversity and the stewardship code.

Touching upon the viability statement, Bischoff stated that while some have ‘questioned whether we are asking companies to stare into a crystal ball … we believe we are asking them to do what they should already be doing: evaluating risk effectively and making their shareholders’ needs a priority in their reporting.’

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