Does the UK Corporate Governance Code of “comply or explain” lead to better disclosures

Does the UK Corporate Governance Code of “comply or explain” lead to better disclosures

Does the UK Corporate Governance Code of “comply or explain” lead to better disclosure?




UK Corporate Governance Code operates on a "com" basis. This essay discusses whether this leads to better disclosure or allows companies to operate in any way they choose to comply or explain. Following the 2008 global financial crisis as the recent Libor rate scandal involving Barclays, it is still very much debatable whether the corporate governance code is really lead to better disclosure. When Barclays was fined £290m in 2012 for manipulating Libor rates, it was yet another blow to UK corporate governance. In 2013, Deloitte were fined £14million by the FRC for violating its Ethical Standards guidelines when handling the sale of MG Rovers.  All these examples show that corporate governance is still a problem in the UK.

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What is corporate governance?

Corporate governance is simply the system of private and public institutions, the laws and regulations, and business practices which together in market economy, help govern relations between corporate insiders (like managers and entrepreneurs) and those investing resources in corporation (Elliott and Elliott 2012)

When corporate governance is said to be working well, one can expect compliance with laws and norms of society where business acts as good citizens, avoiding unnecessary risk which might damage corporation, looking after interests of shareholders and treat employees well. The objective of good corporate governance is spirit of fairness and good behaviour in business behaviour (Elliott and Elliott 2012). But because corporations are run by people, corporations do act badly just like people in society. The greedy nature of people means that systems such as the UK Corporate Governance Code have been introduced to stop fraud, misrepresentation, misappropriation and anti-social behaviour in corporations. Corporate governance systems try to constrain unethical people taking advantage of society at large through business behaviour (Elliott and Elliott 2012)

In the UK, this job of setting and enforcing corporate governance standards falls to bodies such as the Financial Reporting Council (FRC) and Ethics Standards Board which monitor financial accounting, reporting and auditing standards to make sure they are high standard (Elliott and Elliott 2012). But the main principle of the UK Corporate Governance Code since it was introduced is “Comply or explain”. This principle requires all listed companies to report how they apply the Code’s principles, stating whether they comply with all detailed provisions, and if not explain why not. The job of overseeing compliance falls to company auditors but this may be its Achilles heel as seen in the audit expectations gap (Porter et al 2012). In fact, the failure of corporate governance is often a failure of the auditing process and auditors.

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Does the Corporate Governance Code of “comply or explain” lead to better disclosure or simply allows companies to operate in any way they choose?

The aim of the Code is to improve market confidence and provide sufficient protection to investors. But the Code is non-statutory which to mean that it is not a law. The reason is that after scandals like Enron, the FRC felt that compliance was more valuable to businesses. Companies in the UK do indeed disclose information regarding all areas of corporate governance but this also needs independent auditing which unfortunately often fails (Dewing and Russell 2003). The recent example of the Libor rate scandal by Barclays and other banks where they manipulates the Libor rate is an example business dishonesty happening because of weakness in monitoring compliance.

The code and other guidelines such as the FRC “Ethical Standards” are followed by companies in the UK but the problem of “comply or explain” is that monitoring compliance is proving difficult which is why it looks like companies continue to operate in any way they choose.. For example, in 2013, Deloitte were fined £14million by the FRC for violating its Ethical Standards guidelines (Financial Times 2013). These scandals show that the “comply or explain” principle is to an extent allowing companies to operate in any way they choose because if they weren’t, such scandals would not be happening. But as Dewing and Russell (2003) argue, statutory compliance is not the solution either because even that will require monitoring compliance. And when it comes to monitoring compliance, auditing remains the weak link (Porter et al 2012).


It can therefore be concluded that the “comply or explain” principle is not leading to better disclosure. But it is also not true that companies are operate in any way they choose because if they did, financial news would be full of scandal after scandal. In fact, good corporate governance will not stop all fraud as seen in the recent Barclays Libor rate scandal but what it does is stop it from being so widespread. So while the UK corporate governance code of “comply or explain” does not lead to 100 percent better disclosure, it also does not allow most companies to operate in any way they choose. “Comply or explain” is a bit like a CCTV camera that monitors and deters crime and while it cannot stop it as it happens, it will help in the prosecution of the crime doers. Statutory enforcement of code will not work, if it did, employment tribunals would have been out of business a long time ago.

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BBC (2013) “Timeline: Libor-fixing scandal” Available [Online] at[Accessed 20 February 2014]

Dewing, I.P. & Russell, P.O. 2003, "Post-Enron developments in UK audit and corporate governance regulation", Journal of Financial Regulation and Compliance, vol. 11, no. 4, pp. 309-322

Elliott, B., & Elliott, J (2012) “Financial Accounting and Reporting” 15th Edition, FT Prentice Hall

Financial Times (2013) “Deloitte hit with £14million fine over MG Rover” London, United Kingdom

Porter, B., hÓgartaigh, C. Ó. and Baskerville, R. (2012) “Audit expectation-performance gap revisited: Evidence from New Zealand and the United Kingdom, International Journal of Auditing, 16(2), pp. 101–247.


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