'Comply or Explain' Provisions Could Affect Multinationals

Multinational and domestic companies working in the U.K. are expected to adhere to a national corporate governance code, or else issue an explanation to stockholders. The "comply or explain" policy is meant to foster greater transparency, and a recent study from accounting and corporate governance watchdog, the Financial Reporting Council, found that the "vast majority" of listed companies follow this guidance, Accountancy Age reports.

But the FRC found that a small group of businesses in the U.K. have not given their shareholders an answer about why they ignore governance best practice, the source notes.

In its review of approximately 60 U.K. annual reports, the watchdog noted that many of the explanations often did not supply much information and were somewhat superficial. It's calling for governance reports that are more clear and address points such as how a business strategy is improved through the current state, the news outlet says.

The Guardian notes that the FRC has outlined the essential factors in a "convincing explanation." The company should be sure to provide a historical background to create context, "give a convincing rationale for the action" and "describe mitigating action to address the deviations from the code."

Additionally, the report to shareholders needs to clearly lay out how far from the code the company actually deviated, and should include an estimated date for when it would "return to conforming with the provisions," according to the newspaper.