Investors back flexible governance code

FRC publishes responses to consultation on UK corporate governance system

Investors have strongly backed the flexibility of the UK’s corporate governance rules. Shareholder groups that responded to a consultation on the UK code are broadly happy with the existing comply-or-explain approach.

They voice concern, however, over the quality of corporate reporting and say companies should do more to explain their positions when they do not comply with the code.

‘The general tone of the comments we received from both companies and investors is that, by and large, they prefer the flexibility the comply-or-explain approach provides,’ says Chris Hodge, head of corporate governance at the Financial Reporting Council (FRC), which is conducting the review. ‘That’s not to say they think it’s working perfectly. Investors still have concerns about the quality of some of the disclosures companies make, which they think aren’t sufficiently informative.’

The UK’s governance rules – known as the Combined Code on corporate governance – have come under scrutiny following the failure of several of the country’s financial institutions.

Some have called for a radical overhaul of the system to prevent a repeat situation, including making parts of the code mandatory. The Association of Chartered Certified Accountants, the global accountancy body, says in its submission to the FRC that the comply-or-explain approach is ‘excessively flexible’ and ‘inadequate’.

But large investor groups tend to support the existing system in their responses, including the Association of British Insurers (ABI) and Hermes Equity Ownership Services (HEOS), which operates the UK’s largest pension fund. The ABI says the UK system ‘has served us well and we continue to support the code’, while HEOS observes that the ‘comply-or-explain principle continues, in our view, to have significant merit.’

Both add that corporate reporting and disclosure by companies need to improve in quality. ‘We believe that, for it to work properly, boards need to demonstrate better that their behavior is in tune with the spirit of the code,’ writes HEOS in its submission.