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Business Comment

James Moore: 'Comply or explain' shouldn't be optional

Outlook It is common for executives to start tearing their (thinning) hair when the subject of corporate governance is mentioned. A commonly held view among the business elite is that it amounts to little more than box ticking while taking up an inordinate amount of time.

Some are even prepared to whine in public, contrasting their situation with that enjoyed by their colleagues running privately held businesses, whom they believe have their hands free to make real profits.

That attitude is both out of date and mistaken. One needs only to consider the disaster created by a certain Fred Goodwin, who was given a very free hand at Royal Bank of Scotland, to see that although, to be fair, RBS complied with the rules, its chairman just didn't do his job.

The fact that the attitude still exists, however, is made rather clear in a report from the Financial Reporting Council with the help of the London Business School.

The governance code operates on the basis of "comply or explain", meaning that if a company breaks the rules it is under an obligation to tell investors why it has done so.

Trouble is, as the report finds, rather too many (up to a third of non-compliers) aren't bothering to explain properly. Hence the FRC's suggestion that they shape up. It wants companies to give reasons why not complying helps their business models. Cue howls from outraged executives: no more box ticking!

In fact this is an entirely sensible idea. If a company can't explain why not complying with the code assists its business model then it is either being lazy (investors take note) or simply does not understand its business models well enough to explain.