UK regulator to look at quality of explanations in ‘comply or explain’ disclosures

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

The ‘comply or explain’ principle gives companies flexibility, but the FRC has reminded 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.

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. But the FRC is concerned that companies may not be making their shareholders’ needs a priority in their reporting — hence the plan to monitor companies’ explanations when they are not compliant with the Code.

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