The Association of British Insurers (ABI) has published a report on the views of investors in relation to explanations given by companies which depart from the requirements of the UK Corporate Governance Code. This follows meetings convened by the Financial Reporting Council earlier this year between companies and investors, where companies indicated that further clarity from investors on what constitutes a good explanation would be beneficial.
The ABI has developed six key criteria to assist companies in preparing Code explanations, which are designed to provide investors with the information necessary to consider whether the alternative approach a company has chosen in particular circumstances remains aligned with their interests. These six criteria are:
- The company should consider the context in which it is making its governance decision, including the historical background and business specific reasons that means that it is in the shareholders’ long-term interests to take a different approach from that set out in the Code.
- The company must provide a convincing and understandable rationale for the governance decision which is linked to the business-specific context and governance model employed.
- Companies should consider whether any mitigation measures are appropriate to address any additional risk and, if not, to explain why.
- Companies should consider whether Code departures should only be in place for a limited period of time. If they are not, they should be reviewed periodically.
- Explanations of departures from the Code should be linked to specific Code provisions as well as to the Code’s main principles.
- Companies should explain how any alternative arrangement is consistent with the Code’s principles and contributes to the objective of good governance.
Based on a sample of 128 FTSE All Share companies, the report identifies areas where companies’ explanations are failing to meet these criteria and identifies areas for improvement. It also gives examples of best practice disclosures.
A copy of the report is available here.