Newsflash – FRC publishes updated guidance on ‘comply or explain’ reporting

The Financial Reporting Council (FRC) has published “Improving the quality of ‘comply or explain’ reporting”, an update to previously issued guidance to reflect the experience of the past few years, including the first reports from companies following the 2024 UK Corporate Governance Code (the “Code”).

The FRC explains that the Code is designed to allow companies to demonstrate the quality of their governance processes and to describe how board oversight sets up a business for success.

In particular the FRC expresses a desire for investors and advisers to treat departures from the Code with less suspicion: 

“Over time we have noticed that this flexible framework has, by some stakeholders, been turned into a compliance exercise, from which companies feel they cannot depart. This was not, nor is it now, the basis on which the Code was introduced. The principles are to be applied, and the provisions either followed, or an alternative approach explained within the spirit of the Code – demonstrating good governance practice. It is important to emphasise that an explanation is, in our view, evidence of better governance than tick box compliance, especially in a case where a Code provision doesn’t suit a company’s circumstances.”

The guidance sets out three key elements of a company’s ‘comply or explain’ reporting:

• Transparency – companies should ensure they have identified any departures from the Code and reported transparently about these so that investors and other stakeholders can assess a company’s approach to governance.
• Clarity – companies should either state they have complied with all provisions of the Code or state which provisions they have departed from, including naming the provision and providing either an explanation or a cross-reference to where such an explanation can be found.
• Clear and meaningful explanations – these should set the context and background, give a convincing rationale for the approach being taken, consider any risks and describe any mitigating actions and set out whether the company intends to comply (and if so, when). The FRC adds that explanations should be understandable and persuasive.

The guidance also includes two appendices setting out the FRC’s views on two areas where it has identified some challenges in annual reports:

• Non-compliance with Provision 9 (the independence of the chair) – the FRC highlights that explanations are often vague and lacking information or that they reference an earlier annual report. It says that each annual report should include a full explanation which sets out the background (explaining why the chair was not independent when first appointed) and covers the reasons why a new independent chair may not offer the same or better skillset than the current chair, as part of the clear and meaningful explanation described by the guidance.
• Following Audit Committees and the External Audit: Minimum Standard – the annual report should make it clear which points of the Minimum Standard have been followed and which have not. If the audit committee does not follow the Standard at all, it should disclose a departure from both Provisions 25 and 26 of the Code and should include a clear and meaningful explanation to provide suitable context. 

Further details can be found here. 

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