Making Your Board a Strategic Asset

Following consultation between companies and investors, the FRC has just published an interesting paper titled ‘What Constitutes an Explanation Under ‘Comply or Explain’?’.

They, quite rightly, state that the concept of Comply or Explain has helped to improve corporate governance in the UK but they also recognise that there are still examples where organisations fail to properly explain deviations from best practice. The aim of the FRC’s consultation is to ensure that where a company has to explain, the explanation meets the expectations of shareholders.

There is general acceptance that the starting point should be for organisations to improve the disclosure of how their governance arrangements support the business model. This is not about more disclosure but, through better quality disclosure, improving shareholder trust and, importantly, helping to improve the acceptance of explanations when a company does deviate from the Code.

The context for explanations should be that shareholders do expect companies to comply with the code but when they do need to deviate the explanation must be specific to the company and its position rather than generic.

The key features of a meaningful explanation are that it should: set the context and historical background, provide a convincing rationale, describe the actions taken to mitigate associated risk and to maintain conformity with the relevant principle, and if and when the company expects to return to conformity. Explanations should be understandable and persuasive, and should also be the foundation for ongoing dialogue.

The full report can be viewed on the FRC’s website,

Let us hope that this welcome guidance helps to prove that the current system works and can deliver transparency and confidence. Also, improving the quality of explanations will reduce the likelihood of regulatory interference and help to persuade Brussels that there is no need to pursue the introduction of new prescriptive regulation.