EU to push on with tougher ‘comply-or-explain’ corporate governance reporting, while UK pushes back

The European Commission (EC) is pushing ahead with plans to tighten the ‘comply-or-explain’ regime for corporate governance reporting by European companies, in moves that look set to put it on a collision course with governments including that of the UK. Olivier Guersent, Head of Cabinet for Michel Barnier, EU Commissioner for Internal Markets and Services, told the International Corporate Governance Network (ICGN) conference in Paris on September 13 that the Commission is keen that the ‘explain’ portion is given teeth amid concerns that companies’ explanations for opting out of European governance codes are not verified. The toughening of the comply-or-explain regime was outlined in the EC’s Green Paper on Corporate Governance, which was issued in April in response to the global financial crisis. The Green Paper suggested that securities regulators, stock exchanges or other authorities could check whether the available ‘explain’ information was sufficiently informative and comprehensive. However, speaking at the same conference, Vince Cable, UK Business Secretary, said that while the UK government was supportive of much of the Green Paper, it would push back on recommendations that it said were “overly prescriptive”, notably the comply-or-explain proposals.Cable said: “Comply-or-explain is an acknowledged strength of our corporate governance system. In general it works because it allows companies of various sizes, industry sectors and stages of development to evolve their governance over time and change it depending on economic circumstances.” He challenged the EC to adopt three tests to measure whether any change to the current regime would be sensible. These, he said, were: “flexibility, rationale and evidence of improvements in governance.” Asked by Responsible-investor.com what the UK’s response would be to a hardening of the explain requirement, Cable said the government would seek support from other EU partners to lobby against any change. The EC received more than 400 comments on its Green Paper before the deadline of July 22. Other major themes of the Green Paper included shareholder responsibility, asset owner/manager relationships, investor co-operation on engagement, a focus on proxy voting advisors, shareholder voting on pay, and gender diversity. A feedback statement summarising the responses is due in the autumn, followed by a decision on legislation.