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Businesses Should Stop Complaining About “Comply Or Explain”

“We have created an environment where ‘comply or explain’ becomes ‘comply or not.'” Julia Hogget saidthe CEO of the London Stock Exchange said at a parliamentary hearing last month.

But is this feeling really new? “At the moment, the public mood is more towards ‘Obey or obey!’ rather than ‘Obey or explain,'” wrote Sir John Parker, then-President of Anglo-American. there is Memorial essay collection published in 2012 We are celebrating 20 years of the creation of the Cadbury Code and the birth of Britain’s flexible, principles-based system of corporate governance.

Perhaps that was expected in the aftermath of the financial crisis. But what is this? In 2003, CBI Deputy Director John Cridland complained of investors’ nitpicking, stating that “‘observe or explain’ has become ‘observe or else’.”

Perhaps this time the critics of the UK’s trademark approach to governance really mean it.

Along with corporate dissatisfaction, there is also an opposition movement. No less authoritative than the 1992 Financial Times Rex column called the Cadbury Commission’s reliance on self-regulation “movingly naive” and “the great and good men who compiled this Commission , I don’t want to be inconvenienced by too big a change.”

Eventually, this approach was also adopted by many other jurisdictions around the world. Best practice guidelines rather than prescriptive rules, as there is no one size fits all for effective governance and shareholders should decide whether a particular structure is best for the company in the long run. The idea is that the is more effective. Interested.

Over the years, complaints have been made that boards are not particularly interested in explaining, or at least not doing so well, when they are unwilling to comply. The Financial Reporting Board highlighted “boilerplate and inefficient reporting.”this week it Consultation on renewal started The UK’s Governance Code includes new principles aimed at improving ‘comply or explain’ reporting.

The FRC also reports that the level of compliance has declined since 2020, with the ultimate threat being particularly non-binding shareholder votes, and companies registering their dissatisfaction with historically vanishing shareholder votes. This suggests that the board is willing to accept the “or else” option. less likely to lose.

Brian Cheffins of the University of Cambridge argues that one of the problems is that the code extends to various complex areas such as diversity and climate that would have been foreign to its originator. there is Governments have pulled back from enacting policies such as Prime Minister Theresa May’s short-lived flirtation with board workers, and instead enshrined the wishful thinking of this idea in their legislation.This week’s update focused on Internal control after the government fled The introduction of appropriate Sarbanes-Oxley equivalents that hold directors accountable for financial reporting governance is also a good example.

A logical alternative would be for governments to legislate and regulate where they really want compliance, rather than pushing the blame onto asset managers and owners. This means less flexibility and more rules.

But “comply or explain” is also used as an abbreviation for other more thorny issues.that should be cut off from the fight over salary, for example. Compensation is embedded in the governance code. However, information disclosure and “salary statements” that cause company anxiety are matters of corporate law, not corporate governance guidelines.

One of the underlying complaints is that the average UK shareholder register has more overseas, especially US shareholders. They may be more likely to ignore explanations and follow the rulings of proxy advisors like ISS and Glass Lewis.

The other is that asset managers with back-and-forth operations have fewer resources trained in UK domestic equities than in previous years, and have no independent sources to assess best practices. They often have a set of internal ESG policies. “It just doesn’t meet the expectations of 100 different investors,” GSK Chairman Jonathan Simmons said rightly at the same congressional hearing. With 11 percent of the biggest negative votes (and paid) at this year’s GSK annual meeting, it doesn’t look like he’s doing too badly either.

Given these underlying issues, it’s unclear how the “comply or explain” changes will help. Boards have historically viewed shareholder revolts as career-limiting failures, but they need to be more resilient to dissent and disagreement rather than chasing the 99% rubber stamp of the past. There may be


https://www.ft.com/content/d1bd37cc-e71c-493d-bc12-e1ce0e8989fd Businesses Should Stop Complaining About “Comply Or Explain”

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