Wednesday, October 05, 2011

Senior Official Emphasizes Support for Comply-or-Explain Aspect of UK Corporate Governance Code

Despite the concerns of some EU officials, Stephen Haddrill, Chief Executive of the Financial Reporting Council, strongly affirmed the continued viability of the UK comply-or-explain corporate governance code, which gives companies flexibility to implement the Code's provisions in way that regulations would never afford. In remarks at a recent seminar on governance, the chief of the FRC, which has oversight of the UK Corporate Governance Code, also noted that the FRC is considering changes to the Code on narrative reporting and the work of audit committees. He also noted that this month the FRC will formally respond to consultation on whether the UK Corporate Governance Code should be amended to take account of Lord Davies' recommendation that companies should publish their policies on gender diversity and their progress towards recruiting more women to senior board level roles.

The comply-or-explain system is not some cosy, self-regulatory compromise, said Mr. Haddrill, rather the UK Code is based on robust company law and the listing rules and it works. This approach has brought about higher standards of corporate governance than enjoyed elsewhere and has done so faster. The UK established audit committees well ahead of others in Europe and separated the role of chairman and CEO years ago, while Brussels is only now proposing rule changes on this for banks. The UK Code has been aspirational, he noted, and the flexibility of comply or explain means that companies have been willing to accept this. Such aspirations would have been fought and watered down if proposed as regulations.

But the FRC has not been complacent, he said, and will be looking into the quality of the explanations companies provide to shareholders when they do not comply with a provision in the Code. The FRC CEO views this as a constructive response to EC concerns.

Finally, he emphasized that the success of a comply or explain corporate governance code depends on investors playing their part. Investors have more rights and potential for influence in the UK system than in almost all other countries. The FRC looks to investors to engage and be transparent about their dialogue with companies.

In this regard, he said that the new Stewardship Code for institutional investors can be very helpful. Although sponsored by the FRC, it is really owned by the community who use it, company owners. Since the Code was launched a year ago, he noted, the FRC has been delighted with the number of investors who have signed up to the Code's principles.

The European Commission has begun a significant and historic effort to reform corporate governance with publication of a Green Paper, which could lead to broad EU legislative proposals later this year, including the tightening of the comply or explain model, which has been the bedrock of EU corporate governance. While most EU Members have voluntary corporate governance codes, the Commission has evidence of shortcomings in the application of these codes when reporting on the comply-or-explain basis. The Green Paper raises questions as to whether shareholders have been derelict in not holding boards to account, and raises the possibility of legislative intervention to enforce governance standards.

Similarly to the FRC, German officials reiterated their confidence in the voluntary nature of the German Corporate Governance Code. In remarks on the tenth anniversary of the Code’s initiation, Klaus-Peter Müller, Chair of the Government Commission on the German Corporate Governance Code said that the comply or explain principle at the core of the Code allows for the needed transparency. The generally accepted Corporate Governance Code provides listed German companies with a flexible framework for good corporate management that can stand up to comparisons with international rules, noted the Chairman.

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