Companies should stop complaining about ‘comply or explain’

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“We have created an environment in which ‘comply or explain’ has become ‘comply or otherwise'”, said julia hoggettchief executive of the London Stock Exchange, at a parliamentary hearing last month.

But is this feeling really new? “Currently, the public mood is leaning more towards ‘comply or else!’ than ‘comply or explain,'” wrote Sir John Parker, then chairman of Anglo American, in a 2012 collection of essays to celebrate the 20th anniversary of the Cadbury Code and the birth of Britain’s principled and supposedly flexible system of corporate governance.

That was to be expected, perhaps, after the financial crisis. But what is this? John Cridland, deputy director general of the CBI, complained in 2003 about the pickiness of investors: “’Comply or explain’ has become ‘Comply or else,’” he said.

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

Along with the corporate complaints, there has been a drumbeat of opposition. No less than the Financial Times column Lex in 1992 called the Cadbury committee’s faith in self-regulation “touchingly naive”, speculating that “the great and good who compiled it don’t want to be inconvenienced by too many changes”.

Ultimately, the approach was followed by many other jurisdictions around the world. The idea is that best practice guidelines work better than prescriptive rules, because there is no single search for effective governance and it should be up to shareholders to decide whether a particular configuration is best for a company in the long term. interests.

There have long been complaints that when boards don’t want to comply, they don’t particularly care to explain, or at least not well. The Financial Reporting Council has highlighted “repetitive language and ineffective reporting”. this week started a query about the upgrade the UK governance code, including a new principle to try to improve “comply or explain” reporting.

The FRC has also reported declining levels of compliance since 2020, suggesting that boards are willing to tolerate the “or else,” particularly as the ultimate threat is to register dissatisfaction in a non-binding shareholder vote or one at the that the company, historically, has a smaller and smaller participation. small chance of losing.

One problem, Brian Cheffins of the University of Cambridge argues, is that the code has mushroomed in several complex areas, such as diversity and climate, that would have been alien to its creators. Governments have backed away from legislating policies like Theresa May’s short-lived flirtation with workers on boards, instead tossing a bland version of the idea into code. This week’s update, which focused on internal controls after the government circumvented the introduction of a proper Sarbanes-Oxley equivalent that would have made directors responsible for the governance of financial reporting is another example.

The logical alternative would be for the government to legislate and regulate where it actually wants compliance, rather than place liability on asset owners and managers. This would mean less flexibility and more rules.

But “comply or explain” is also used as shorthand for other thornier issues. Should be separated from disputes about payment, For example. The remuneration appears in the government code. But the disclosure and “say about pay” votes that cause companies angst are a matter of corporate law, not corporate governance guidance.

An underlying frustration is that a growing share of the average UK shareholder registry is abroad, particularly in the US: they may not care about explanations and are more likely to follow the decisions of advisers of representation like ISS and Glass Lewis.

Another is that the asset managers that do get involved have fewer resources trained in UK national equities than in years past, and often have their own particular set of internal ESG policies against which they measure best practice. “It’s just that we can’t meet the expectations of 100 different investors,” Jonathan Symonds, the chairman of GSK, rightly said at the same parliamentary hearing. The biggest vote against at GSK’s annual meeting this year was 11 percent (and on pay), so that doesn’t seem too bad either.

It’s not clear how changing “comply or explain” would help given those underlying issues. Boards, which have historically viewed shareholder rebellions as career-limiting failure, may also need to be tougher on dissent and disagreement, rather than craving the 99 percent rubber stamps of the past. .

helen.thomas@ft.com
@helentbiz