The UK’s “comply or explain” approach to corporate governance has allowed the introduction of a “more demanding standard than can be done through hard rules,” according to the Financial Reporting Council (FRC).

The statement comes in the FRC’s response to the European Commission’s recommendations on corporate governance published last year.

The recommendations said: “It is recommended that, where applicable, corporate governance codes make a clear distinction between the parts of the code which cannot be derogated from, the parts which apply on a ‘comply or explain’ basis and those which apply on a purely voluntary basis.”

It goes on to describe broad expectations of corporate governance and its applications by companies.

In its response letter the FRC explains how the UK Corporate Governance Code meets the demands of the recommendation.

The FRC writes: “The FRC considers that the code meets the provisions of the Recommendation. The board agrees the Corporate Governance Statement (which is situated within the Directors’ Report in the Annual Report and Accounts) and therefore must approve any divergence from the Code and the relevant explanation.

“The ‘comply or explain’ method of adherence has given companies flexibility and made it possible to set more demanding standards than can be done through hard rules.

“Experience has shown that the vast majority of companies attain these standards – in 2014 the Grant Thornton survey of compliance by FTSE 350 companies found that 94 per cent of companies complied with all, or all but one or two, of the 54 provisions in the Code.

“And by requiring companies to report to shareholders rather than regulators means that the decision on whether a company’s governance is adequate is taken by those in whose interest the board is meant to act.”

The FRC goes on to explain that it has launched a communications campaign “to raise standards and promote the flexibility of ‘comply or explain’.

“Through this we will be reminding both companies and investors that simply complying without giving due consideration to what is appropriate and relevant reduces the flexibility that this approach aims to achieve.

“To this end, further work will be conducted during the rest of this year to monitor reporting by companies on explanations given when they are not compliant with the code,” says the FRC.

The FRC explains its stance on explanations to Brussels, quoting paragraph 3 of the comply or explain section in the UK code.

In providing an explanation, the company should aim to illustrate how its actual practices are consistent with the principle to which the particular provision relates, contribute to good governance and promote delivery of business objectives. It should set out the background, provide a clear rationale for the action it is taking, and describe any mitigating actions taken to address any additional risk and maintain conformity with the relevant principle. Where deviation from a particular provision is intended to be limited in time, the explanation should indicate when the company expects to conform with the provision.

The FRC concludes by pointing out that it intends to further discuss with the Financial Conduct Authority “the best way to achieve better quality explanations.”