“We have created an environment where ‘comply or explain’ has become ‘comply or else'”, says Julia Hoggettchief executive of the London Stock Exchange, during a parliamentary hearing last month.
But is this feeling really new? “The mood of the public is currently more inclined to ‘comply or else!’ that ‘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 principles-based and supposedly flexible corporate governance system.
This was to be expected, perhaps, in the aftermath of the financial crisis. But what is it ? John Cridland, deputy director general of the CBI, complained in 2003 about the fussiness of investors: “’comply or explain’ has become ‘comply or else’”, he said.
Maybe this time critics of Britain’s approach to governance really mean it.
Along with the corporate grumbling, there has been a drumbeat of opposition. No less authoritative than the Lex column of the Financial Times in 1992 called the Cadbury committee’s faith in self-regulation “touching naivete”, speculating that “the great and good who compiled it do not wish to be inconvenienced by too many changes”.
Ultimately, the approach was emulated 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 setup is best in the long run. term of a business. interests.
It’s long been complained that when councils don’t want to comply, they don’t particularly care to explain – or at least not well. The Financial Reporting Council highlighted “standard language and ineffective reporting”. This week he launched a consultation on the update the UK governance code, including a new principle to try to improve “comply or explain” reporting.
The FRC has also reported a drop in compliance levels since 2020, suggesting that boards are ready to accept the “or else” – especially as the ultimate threat is to register dissatisfaction when ‘a non-binding vote of shareholders or a vote that the company, historically, has on the way out. small chance of losing.
One of the problems, according to Brian Cheffins of the University of Cambridge, is that the code has spilled over into various complex areas, like diversity and climate, that would have been foreign to its creators. Governments backed away from legislating policies like Theresa May’s short-lived flirtation with boardroom workers and instead threw a vapid version of the idea into code. This week’s update, which focused on internal controls after the government dodged another example is the introduction of a true Sarbanes-Oxley equivalent that would have made directors accountable for financial reporting governance.
The logical alternative would be for the government to legislate and regulate where it really wants to comply, rather than shifting responsibility onto managers and asset owners. That would mean less flexibility and more rules.
But “comply or explain” is also used as shorthand for other more difficult questions. It should be separated from salary disputes, For example. Remuneration is included in the code of governance. But the disclosure and say-on-pay votes that companies worry about are matters of corporate law, not corporate governance guidance.
An underlying frustration is that an increasing part of the average UK shareholder register is overseas, particularly in the US: they may not care for explanations and are more likely to follow the decisions of advisers in votes like ISS and Glass Lewis.
Another is that asset managers going back and forth have fewer resources trained in UK domestic equities than before 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,” said Jonathan Symonds, chairman of GSK, not without reason, during the same parliamentary hearing. The biggest vote against at GSK’s annual meeting this year was 11% (and on pay), so he doesn’t seem to be doing too badly either.
It’s unclear how changing “comply or explain” would help given these underlying issues. Boards, which have always viewed shareholder rebellions as a career-limiting failure, may also need to be more insensitive to dissent and disagreement, rather than dreaming after the 99% rubber stamps of the past.