The Code sets high standards for corporate governance but the FRC recognises that companies have differing circumstances and so the Code offers flexibility through its ‘comply or explain’ approach to reporting.
The FRC encourages companies to embrace the flexibility offered by the Code so that investors and wider stakeholders benefit from reporting that clearly demonstrates a commitment to good governance, and sets out a company’s circumstances.
The FRC guidance stated: ‘Sometimes a departure from the Code is unavoidable: for example, if a director resigns without advance notice, leaving the board with less than half of the board made up of independent non-executive directors (NEDs). Companies should use the flexibility offered by the Code to adjust their governance to their changing circumstances in both the short and long term.’
However, there was a lack of transparency in some instances where companies did not follow the code. The FRC said: ‘We were disappointed with the quality of the explanations provided by companies for non-compliance with the provisions of the Code and struggled to find robust explanations. Our sample identified 74 cases of non-compliance with the Code, but we found only four explanations that we considered high quality and offered an insight into the companies’ approach to good governance. The majority of explanations were inadequate, and in one instance, not given at all.’
A good explanation should demonstrate that departure is justified given the company’s specific circumstances. It should set the context and background, give a convincing rationale for the approach being taken and consider any risks and describe any mitigating actions. It should also set out when the company intends to comply with the timescales, particularly when it extends beyond the full accounting year.
Source: AccountancyDaily