“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 climate, that would have been alien to its originators. Governments have backed off from legislating on policies like Theresa May’s shortlived flirtation with workers on boards, and dumped a wishy-washy version of the idea in the code instead. This week’s update, which focused on internal controls after the government ducked introducing a proper Sarbanes-Oxley equivalent that would have made directors responsible for financial reporting governance, is another case in point.
The logical alternative would be for the government to legislate and regulate where it really wants compliance, rather than pushing the responsibility on to asset managers and owners. This would mean less flexibility and more rules.
But “comply or explain’‘ also gets used as shorthand for other, more thorny issues. It should be separated from wranglings over pay, for example. Remuneration does feature in the governance code. But the disclosure and “say on pay” votes that cause companies angst are a matter of corporate law, not corporate governance guidance.
One underlying frustration is that an increasing portion of the average UK shareholder register is overseas, particularly in the US: they may not care about explanations and are more likely to be following the rulings of proxy advisers like ISS and Glass Lewis.
Another is that the asset managers that do engage in back and forth have fewer resources trained on UK domestic equities than in years gone by and often have their own particular suite of internal ESG policies against which they measure best practice. “It is just that we cannot meet the expectations of 100 different investors,” Jonathan Symonds, chair of GSK, said not unreasonably at the same parliamentary hearing. The biggest vote against at GSK’s annual meeting this year was 11 per cent (and on pay) so he also doesn’t seem to be doing too badly.
It’s not clear how changing “comply or explain” would help given those underlying issues. Boards, which have historically seen shareholder rebellions as a career-limiting failure, may also need to be more thick-skinned about dissent and disagreement, rather than hankering after the 99 per cent rubber-stamps of the past.