Comply or explain – explanations found wanting

ABI highlights investor expectations for corporate governance explanations

The Association of British Insurers (ABI) HTWB-question-markhas published a report following its review of the explanations made by 128 companies that had departed from the UK Corporate Governance Code. It found that many of the disclosures failed to meet investors’ needs.

The report identifies six criteria to assist companies in preparing their explanations of non-compliance and gives examples of good and bad practice. The criteria largely reflect the elements of the guidance now included in the latest update to the UK Corporate Governance Code. A company’s explanation of non-compliance should:

  • describe the company-specific context and historical background;
  • provide a convincing and understandable rationale;
  • describe mitigating action to address any additional risk;
  • be time bound;
  • specify deviations from the provisions as well as the principles of the Code; and
  • explain how the alternative is consistent with Code principles and contributes to good governance.

According to the report, only 27% of companies provided a convincing and understandable rationale for non-compliance and only 20% provided any description of mitigating action. 16% of companies met none of the criteria.

The ABI found that disclosure was better where the chairman provided an introduction to the corporate governance statement and encourages all chairmen to do this. It also encourages smaller companies to make improvements to their disclosures, stressing that such companies may well have good reasons for departing from the Code given the nascent development of their business or the uniqueness of their products and services.

The ABI’s report can be found here..

 

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