“We have created an environment where ‘comply or explain’ has become ‘comply or else’,” said Julia Hoggett, chief executive of the London Stock Exchange, at a parliamentary hearing last month.
But is this sentiment really new? “The public mood is currently more inclined towards ‘comply or else!’ than ‘comply or explain’” wrote Sir John Parker, then chair of Anglo American, in a 2012 collection of essays to celebrate the 20th anniversary of the Cadbury Code and the birth of the UK’s system of principles-based, supposedly flexible corporate governance.
That was to be expected, perhaps, in the aftermath of the financial crisis. But what’s this? John Cridland, deputy director-general of the CBI, in 2003 complaining about investor nitpicking: “‘comply or explain’ has become ‘comply or else’”, he said.
Maybe this time the critics of the UK’s trademark approach to governance just really mean it.
Alongside the corporate griping, there has been a drumbeat of opposition. No lesser authority than the Financial Times’s Lex column in 1992 called the Cadbury’s committee’s faith in self-regulation “touchingly naive”, speculating that “the great and the good who compiled it do not wish to be inconvenienced by too much change”.
Ultimately, the approach was aped by many other jurisdictions around the world. The idea is that best practice guidelines work better than prescriptive rules, because there is no one-size-fits-all look for effective governance and it should be for shareholders to decide whether a particular set-up is in a company’s best long-term interests.
There have long been complaints that where boards don’t want to comply, they don’t particularly care to explain — or at least not well. The Financial Reporting Council has highlighted “boilerplate language and ineffective reporting”. This week it launched a consultation on updating the UK governance code, including a new principle to try to improve “comply or explain” reporting.
The FRC has also reported falling levels of compliance since 2020 suggesting boards are willing to countenance the “or else” — particularly as the ultimate threat is to register dissatisfaction in a non-binding shareholder vote or one that the company, historically, has a vanishingly small chance of losing.
One issue, argues Brian Cheffins from the University of Cambridge, is that the code has mushroomed into various, complex areas, like diversity and…
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