Britain's corporate regulator has warned the European Commission not to undermine the “comply or explain” principle as it develops a new cross-Europe approach to corporate governance.
The Financial Reporting Council (FRC) told the Commission that replacing principles with prescriptive rules could stifle enterprise at a time when European economies are seeking to promote economic growth.
The principle of “comply or explain” – where companies can diverge from a best practice code if they give their reasons – plays an essential part in good governance, the FRC said.
The regulator's warning forms part of its response to a governance policy paper the Commission issued for consultation in April. The paper criticised the comply or explain model, saying companies too often gave minimal reasons for non-compliance and regulators did not do enough to scrutinise their disclosures.
The FRC said it recognised the need to make the system work better and called for companies and investors to reach a consensus about what constitutes a clear explanation to shareholders.
Stephen Haddrill, FRC chief executive, said the regulator would look at ways of “enhancing” the quality of corporate governance disclosures. “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,” he said.