comply or explain

Question 1

What is “Comply or Explain”?

Answer 1

Companies are not legally required to comply with every provision in the Code, but if they choose not to comply, they must explain why.

Question 2

Why is it used?

Answer 2

• principles-based approach rather than a strict rules-based one
• allows companies to tailor their governance based on their size, structure, and circumstances, while still being held to high standards.

Question 3

How does it work in practice?

Answer 3

Whether they comply with each provision in the Code.

If not, they must explain clearly:

• Why they do not comply.
• What alternative arrangements are in place.
• How these achieve the same outcome as intended by the provision.
• These explanations are given in the annual report or corporate governance statement.

Question 4

Benefits of “Comply or Explain”

Answer 4

✅ Advantages
- Allows flexibility for companies.
- Encourages innovation in governance.
- Promotes transparency and dialogue with investors.
- Ensures focus on outcomes not just box-ticking.

Question 5

🔹 Drawbacks and Limitations

Answer 5

⚠️ Challenges
- Companies may give vague or generic explanations.
- Some may technically comply, but not in spirit.
- Relies heavily on shareholders to challenge poor practices.

Question 6

🔹 What has the UKCGC 2024 done to improve this?

Answer 6

To strengthen the “comply or explain” model, the 2024 Code encourages:

• Clear, specific and outcome-focused explanations.
• Signposting and cross-referencing to relevant parts of the report.
• Explaining the rationale and impact of not complying.
• Transparent reporting on how governance practices benefit long-term success.