Monday, 2 April 2012

Financial Reporting Council paper on "Comply or Explain"

In February 2012 the UK's Financial Reporting Council published a report on the "Comply or Explain" approach applied to its Corporate Governance Code. Compliance with the Code is a statutory requirement for listed companies and the report considers two discussion groups, involving representatives of investors and listed companies, that met to discuss the workings of "Comply or Explain".

There are two reasons for producing this report; the first is that the European Commission has asked for views on a proposal that regulators and not shareholders should decide if explanations of non compliance are adequate; the second is that a review of a sample of UK annual reports found a minority of those that had not complied on one or more principles had given only a 'perfunctory' (i.e. inadequate) explanation.

I offer two contrasting thoughts; firstly, that there is a risk that yet more regulation and bureaucracy will simply make declarations even more legalistic and unhelpful (defeating the object of the change); the second, that it is astonishing that company bosses can be so inept and so arrogant as to resist giving proper explanations in the first place. It reminds me of the unhelpful legal boilerplate approach that has been adopted by companies in response to requirements that they disclose the principle risks facing their business. GSK, as I have written before, provides a particularly risible example of this.  I wonder whether the company secretarial staff who produced the 'perfunctory' explanations attended the discussions hosted by the FRC - I bet not.

Baroness Hogg, who chairs the FRC, might ponder whether the answer is for her organisation to adopt a more assertive approach - how about giving those companies whose explanations are inadequate a right kick up the arse? Hauling them in and admonishing them would be a useful first step, followed - if they don't release an adequate statement - by a public shaming. Try that for a while before laying on the dead hand of bureaucracy.

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