Corporate reporting – FRC guidance on comply or explain reporting

The Financial Reporting Council (FRC) has published guidance aimed at helping companies report on departures from provisions of the UK Corporate Governance Code, under the Code’s comply or explain framework. 

Where companies do not comply with a provision in the Code, they are required under the UK Listing Rules to disclose that and give the reasons for non-compliance (UKLR 6.6.6(6)) – an approach known as “comply or explain”. Concerns have been raised in the past that some companies are reporting full compliance where there have in fact been departures from a provision of the Code and also that some investors are favouring full compliance with the Code over a tailored, company-specific approach.

The FRC says a good explanation for a departure from the Code should:

• set the context and background (including identifying the specific provision which has not been complied with);
• give a convincing rationale for the approach being taken (i.e. why the departure was necessary);
• consider any risks and describe any steps taken to mitigate the risks;
• set out whether the company intends to comply, and if so when; and
• be understandable and persuasive.