FRC report on improving “comply or explain” reporting

The Financial Reporting Council (FRC) has published a report on improving the quality of “comply or explain” reporting under the UK Corporate Governance Code.

Where companies do not comply with a provision in the Code, they are required under the Listing Rules to disclose that and give the reasons for non-compliance (LR 9.8.6(6)). In its Annual Review of the UK Corporate Governance Code (see our blog post here), the FRC found that an unexpectedly high number of companies in its sample claimed full compliance with the Code but could not demonstrate this in their reports.

The report states that companies should be clear about the provisions of the Code that they have departed from during the year in review and make this information easily accessible in the annual report. They should also include a full and comprehensive explanation for non-compliance that shows that an alternative arrangement is more appropriate and beneficial in upholding high standards of governance. In particular, a good explanation should:

• set the context and background;
• give a convincing rationale for the approach being taken;
• consider any risks and describe any mitigating actions; and
• set out when the company intends to comply with the provision.

The report also sets out the FRC’s expectations in relation to compliance with a number of specific provisions of the Code, including those relating to stakeholder interests and workforce engagement (provision 5), the chair’s tenure (provision 19), the work of committees (provisions 23, 26 and 41), and a number of remuneration-related provisions including post-employment shareholdings (provision 36), pensions-alignment (provision 38) and engagement with shareholders and the workforce (provisions 40 and 41).