The Spirit of the Code: Making Comply or Explain Work in Practice

Comply or Explain is sometimes treated as a procedural exercise. However, the true purpose is to encourage thoughtful decisions, support accountability, and promote open communication with stakeholders.

In this podcast, Dr Sabine Dembkowski, Founder and Managing Partner, is joined by Kelvin Ernest, a governance professional with extensive experience navigating evolving regulatory expectations and corporate reporting practice. As a Senior Policy Associate in the Financial Reporting Council’s Corporate Governance and Stewardship team, Kelvin contributes to stakeholder engagement, policy development, reporting analysis, research, and the development of the updated UK Corporate Governance Code.

“The biggest takeaway for boards is that it encourages them to think carefully about how each provision fits into their own individual contexts.”

In practice, the UK Corporate Governance Code operates at two levels. Companies apply and explain against high-level principles and then address the more detailed comply or explain provisions. Companies can choose to follow the recommended approach or take a different route that better fits their circumstances. For Kelvin, this is part of how the Code recognises that one size doesn’t fit all and that a well-reasoned departure can be entirely appropriate.

“The flexibility is a real strength of the UK model.”

Kelvin knows that ‘comply or explain’ is widely debated. For him, in rules-only systems, there’s too much formulaic behaviour and box ticking. The UK model allows companies to tailor their governance to their individual company strategy and the complexity of their business.

“More companies are moving away from boilerplate reporting.”

Under the current model, Kelvin notes that companies are shifting what they share. There’s less generic, vague, and boilerplate language. Rationales are clearer. Where there are temporary departures, there’s more insight and disclosure around timeframes, and more evidence of genuine board discussions.

“Explanations don’t exist in a vacuum.”

For boards wondering how to show an alternative approach is best, Kelvin says a good place to start is by linking it to company strategy and culture, day-to-day operations, and the nuances of the industry. Where possible, he recommends outlining the board’s decision-making process and what was considered. He also notes some companies lean on practical evidence.

“Investors want clarity as to why a departure was made and how that supports the long-term value creation of the company.”

Within Kelvin’s team, Corporate Governance and Stewardship, he engages extensively with individual investors and investor groups. He knows investors find it hard to form a view or make decisions based on generic or vague explanations. They want clarity, specifics, and links to a company’s reality.

For companies concerned about balancing transparency with commercial sensitivities, Kelvin notes that too many people believe transparency means revealing confidential details. He says it is more about providing meaningful context. This context serves as a basis for building trust. It reassures stakeholders and demonstrates that the company is making responsible, well-considered decisions.

 

The top three takeaways from our conversation for effective boards are:

• Comply or Explain is about thoughtful governance and not just about reporting.
• High-quality explanations show accountability, demonstrate transparency, and reassure stakeholders that the company is thinking about decisions for the longer term.
• Engagement with stakeholders strengthens trust, helps boards refine their governance approach, and instils confidence in investors.

 

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