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The UK’s Financial Reporting Council (FRC) has issued updated guidance on “comply or explain” governance reporting.
The guidance is aimed at helping investors, proxy advisers and other report users to assess companies that depart from certain provisions of the UK Corporate Governance Code.
The update comes as companies with December year-ends begin publishing their annual reports, marking the start of the first reporting season under the revised code.
In a statement, the FRC stressed that “thoughtful, well-reasoned explanation” for non-compliance is not weak governance.
The regulator said that the guidance is intended to help investors and advisers understand what to look for when reading a departure explanation.
It underlines that a departure, when backed by a clear and transparent rationale, can be a positive sign that the board is “engaging seriously with its governance responsibilities”.
FRC CEO Richard Moriarty said: “The UK Corporate Governance Code is a global standard precisely because it offers companies the flexibility to govern in a way that suits their circumstances.
“A well-reasoned explanation for departing from a provision is not a red flag – it is evidence of a board thinking seriously about what good governance means for their company.
“We want to support companies and investors alike to embrace that spirit with confidence.”
The FRC further noted that a prevailing culture has emerged among issuers, investors and advisers in which any deviation from the code is often treated with suspicion.
As a result, some companies claim full compliance, generating generic disclosures that give little real insight into governance.
During the current reporting season, the FRC intends to continue working with users of corporate reports to encourage application of the updated guidance.
It will report later in the year on the standard of “comply or explain” disclosures as part of its annual review of corporate governance.
“FRC updates guidance on ‘comply or explain’ reporting” was originally created and published by The Accountant, a GlobalData owned brand.
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