The Exchange has responded to the Financial Reporting Council’s review of the Combined Code. Good corporate governance standards are an essential factor in reinforcing the stature and respect the UK financial markets already generate globally. We reinforce the Council’s comment that more time is needed for best practice to ‘bed down’
It is a tenet of the Combined Code that it should enable companies to take a pragmatic approach in demonstrating effective corporate governance, whilst recognising that public market participants apply a significant market pressure on the same companies in this respect. We believe that it is important to avoid a perception that ‘non-compliance’ with the Combined Code translates into poor governance which then requires a unilateral rule and (potentially) an accompanying audit process to be imposed. Both of these create additional costs and place a further strain on management time, an especially important consideration for smaller listed companies.
The ‘comply or explain’ approach means that the UK capital markets enjoy a substantial advantage over their US counterparts where the rules-based Sarbanes Oxley regime operates. We consider it important to ensure that the US approach does not take hold in the UK by stealth, our concern being that without care, what are reasonably intended to be small changes to guidance may have the unintended consequence of being misinterpreted as the creation of rules.