The Code’s principles, which must be applied, are simple and high-level and, as such, the FRC states that all companies should be able to apply them.
When applying the principles, the focus of reporting should be on the activities and decisions taken by the Board, rather than those of senior management, and should demonstrate actions and outcomes, not just policies and procedures. For example, when describing stakeholder engagement, companies should explain how this has influenced board discussions and decisions, not just list engagement channels.
The guidance highlights that all companies are different and that they can demonstrate good governance without following all the provisions. The FRC advises that businesses should therefore embrace the flexibility offered by the provisions, and choose those governance arrangements that are most suitable to their circumstances, while clearly explaining any departures from the Code.
Shareholders, proxy advisors and other stakeholders should not expect or favour strict compliance over effective governance that meets the spirit of the Code, the guidance states. They should also be encouraged to consider departures from the Code positively in their voting policies and build in flexibility to consider the alternative arrangement chosen by the company and the explanation provided, especially where it is transparent and informative.
Explanations are key to the Code’s ‘comply or explain’ nature. A meaningful explanation for a departure shows that an alternative arrangement is more appropriate and beneficial in upholding high governance standards. This, according to the FRC, “allows investors and other stakeholders to consider whether the quality of the explanation achieves effective governance of the company, even though there is a departure from the Code”.
The FRC highlights five essentials of a good explanation for non-compliance:
At Black Sun Global we welcome this guidance and the helpful examples it provides. You can read the full guidance here.
If you would like to speak with one of our corporate reporting advisors about how to improve the quality of your reporting please get in touch with Bob at bcrosbie-dawson@blacksun-global.com.
Black Sun Global is a stakeholder advisory and engagement agency that's been driving transformation and positive change for ambitious brands for more than 20 years. With deep expertise in disclosure and reporting, ESG, sustainability, and digital engagement, we reshape how organisations connect with customers, investors, employees, and the wider world.
We are trusted partners to some of the most influential global organisations, sparking innovation and sustainable performance through our strategic insights, partnerships, and proprietary technologies.
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