The principle of 'comply or explain' plays an essential part in promoting best practice in corporate governance, says the Financial Reporting Council in a submission to the European Commission published today.

In its response to the Commission’s green paper on corporate governance the FRC warns that replacing principles with a series of prescriptive regulations could stifle enterprise at a time when European economies are seeking to promote economic growth.

The FRC’s submission recognises the need to make the system work better. In particular it will be promoting a dialogue with companies and investors in the coming months to seek a consensus in the UK market about what constitutes a clear explanation to shareholders if a company deviates from the UK Corporate Governance Code.

Stephen Haddrill, chief executive of the Financial Reporting Council, said: “We are encouraged by the debate the green paper has generated and hope it will lead to a consensus across Europe about the appropriate balance of rules, rights and codes needed to stimulate good governance and economic growth.

“We believe codes underpinned by law, as in the UK, and including a ‘comply or explain’ approach, are the most effective means of driving up standards. Success depends on shareholders paying attention to explanations. That is why we have developed the Stewardship Code to encourage engagement by institutional shareholders. It now has over 170 signatories. We will also consider how the quality of explanations given by companies can be enhanced. Regulators may have a role in determining whether explanations provide sufficient information but this should only be pursued if it can be done without undermining the role of shareholders and to the benefit of investors.

Confidence in Europe’s financial markets will be enhanced, he stresses, if the public can be aassured that companies are properly accountable. Good corporate governance is thus an integral part of our efforts to ensure that European businesses can raise capital at a reasonable cost to invest, grow and generate jobs”.

Share Story: