Thinking Outside the Box – Eliminating the Perniciousness of Box‐Ticking in the New Corporate Governance Code
| DOI | http://doi.org/10.1111/1468-2230.12415 |
| Date | 01 July 2019 |
| Author | Bobby V. Reddy |
| Published date | 01 July 2019 |
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Modern Law Review
DOI: 10.1111/1468-2230.12415
LEGISLATION
Thinking Outside the Box – Eliminating the
Perniciousness of Box-Ticking in the New Corporate
Governance Code
Bobby V. Reddy∗
On 16 July 2018, a new corporate governance code was published. Like previous iterations,
it applies on a ‘comply-or-explain’ basis, whereby companies are required to either comply
with provisions or explain reasons for non-compliance. However, the new code substantially
simplified the previous version of the code in an attempt to attenuate the process of ‘box-
ticking’. Box-ticking manifests itself firstly, by companies complying with the letter rather than
the spirit of the provisions, and, second, by companies not utilising the inherent flexibility of the
code to implement their optimum firm-specific governance structures by explaining rather than
complying. This article elucidates the history of box-ticking, and the reasons why companies
succumb to it, since Adrian Cadbury pioneered the concept of ‘comply-or-explain’ in 1992,
before proposing an exclusively principles-driven approach to the corporate governance code
which would alleviate box-ticking and fulfill the original aspirations of Cadbury over a quarter
of a century ago.
INTRODUCTION
In 1992, the Committee on the Financial Aspects of Corporate Governance,
chaired by Sir Adrian Cadbury (the Cadbury Committee), published a report
promoting the trailblazing concept of ‘comply-or-explain’ in the context of
corporate governance compliance.1Its successor, the UK Corporate Governance
Code (the Code), published by the Financial Reporting Council (FRC), con-
tinues to apply on a comply-or-explain basis. One of the key benefits justifying
the comply-or-explain approach to compliance, as opposed to mandatory ap-
plication, is that it provides flexibility, giving companies the freedom to deviate
from a requirement of the Code, if the relevant company deems that the re-
quirement does not optimise the health of the company, so long as it explains
to its shareholders the reason for the non-compliance.2
∗Faculty of Law, University of Cambridge; Fellow, Churchill College, Cambridge. Former partner,
Latham & Watkins LLP. I thank the two anonymous referees for their insightful comments.
1Report of the Committee on the Financial Aspects of Corporate Governance (London: Gee Publishing,
1992) (Cadbury Report) 57.
2 See, FRC, UK Corporate Governance Code (London: FRC, 2016) (the Code) 4, ‘Comply or
Explain’: ‘It is recognised that an alternative to followinga provision may be justified in particular
C2019The Author. The Modern Law Review C2019 The Modern Law ReviewLimited. (2019) 82(4) MLR 692–726
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Bobby V. Reddy
However, notwithstanding the intended benefits of comply-or-explain, the
danger persists that companies will engage in a tactic that has been termed ‘box-
ticking’. In effect, this entails a company complying with a specific provision
in a literal sense without observing the spirit of the pr inciple on which the
provision is based. The box-ticking strategy can also manifest itself in boards
erring on the side of caution by determining that it is simpler to comply
with specific provisions rather than to explain to shareholders why it is to the
company’s benefit not to comply. This can result in companies not embracing
alternative corporate governance structures that could be beneficial to firm
performance; eliminating one of the principal advantages of comply-or-explain
over mandatory legislation.
On 16 July 2018, the FRC published the final version of a new Corporate
Governance Code3(the New Code) to be effective for accounting periods
commencing on or after 1 January 2019. One of the stated aims of the New
Code is to emphasise the importance of applying the principles of the Code
rather than merely surrendering to strict compliance with the provisions4–
essentially, an attempt to reduce the preponderance of box-ticking. The New
Code represents the first major revision of the Code in nearly a decade,5with
much anticipation that the New Code will simplify the reporting process for
listed companies. However, the question remains – will the New Code curb
box-ticking?
This article will commence with a description of the attempts to-date to
eliminate box-ticking, together with the reasons for using the strategy, and
its inherent problems. It will continue with a critical analysis of whether and
how the New Code could alleviate the preponderance of box-ticking. The
article concludes by taking a normative approach to how the New Code
could be improved in pursuing that goal and proposes a new principles-driven
methodology to the Code and corporate governance generally, which would
be beneficial to listed companies that exist in what is now very much a mature
corporate governance environment in the UK.
AVOIDING BOX-TICKING: THE ROAD SO FAR
The Cadbury Committee was established in 1991, focusing mainly on audit-
ing issues, but also corporate governance generally. The committee’s report,
published in 1992, encompassed a Code of Best Practice setting-out nine-
teen corporate governance recommendations for listed companies.6The report
circumstances if good governance can be achieved by other means. A condition of doing so is
that the reasons for it should be explained clearly and carefully to shareholders, who may wish
to discuss the position with the company and whose voting intentions may be influenced as a
result.’
3 FRC, The UK Corporate Governance Code (London: FRC, 2018) (the New Code).
4 FRC, Proposed Revisions to the UK Corporate Governance Code (London: FRC, 2017) 4.
5 In 2010, the ‘Combined Code’ was significantly revised and relabelled as the ‘UK Corporate
Governance Code’. Arguably, the last substantive changes were made even longer ago in 2003,
with only ‘limited tweaks’ since, see M. Moore and M. Petrin (eds), Corporate Governance: Law,
Regulation and Theory (London: Palgrave, 2017) 61.
6 n 1 above, 58.
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Thinking Outside the Box
prioritised ‘self-regulation’,7rather than the use of mandatory r ules, and lob-
bied the London Stock Exchange to amend its continuing listing obligations to
require that any company subject to its rules should publish a statement in its an-
nual report stating whether it complies with the Code of Best Practice and iden-
tify and give reasons for any areas of non-compliance.8Thereby, ‘comply-or-
explain’ was born. The advantages and disadvantages of self-regulatory regimes,
and ‘comply-or-explain’ in particular, have been extensively discussed in the
literature9and an overview of the full range of such aspects is beyond the scope
of this article. However, key amongst the advantages is the maintenance of
flexibility for those companies subject to the relevant regime. If the board of
a company resolved that a specific provision of the Code of Best Practice was
not relevant to the company, or did not entail the soundest structure, given the
company’s individual circumstances, the company could deviate from the strict
requirements of that provision, as long as the reasons for such non-compliance
were disclosed in its annual report.10 Additionally, the Code prompted compa-
nies to address substance over form;11 as proclaimed by the Cadbury Report:
‘Statutory measures would impose a minimum standard and there would be a
greater risk of boards complying with the letter, rather than with the spirit,
of their requirements’.12 It is therefore clear that one of the stated aims of this
novel approach was to eliminate box-ticking behaviour.
If it was hoped that the Cadbury Committee’s approach would eradicate
box-ticking, it did not have the anticipated effect. In 1998, the Committee
on Corporate Governance, chaired by Sir Ronald Hampel (the Hampel Com-
mittee), published a report13 that reviewed, and proposed amendments to, the
Cadbury Report and a separate report on directors’ remuneration by a com-
mittee chaired by Sir Richard Greenbury (the Greenbury Committee).14 The
Hampel Report averred that although the Cadbury and Greenbury Commit-
tees had intended that their recommendations be implemented in a flexible
manner, in practice, companies had treated the codes promulgated by such
committees as hard and fast rules.15 In the words of the Hampel Report:
‘Their shareholders or their advisers would be interested only in whether the
7ibid, para 3.14: ‘The responsibility for putting the Code into practice lies directly with the boards
of directors of listed companies to whom it is addressed.’
8ibid, para 3.7.
9 For example, B. Cheffins (ed), Company Law: Theory,Structure and Operation (Oxford: Clarendon
Press, 1997) ch 8; K. Sergakis, ‘Deconstruction and Reconstruction of the “Comply or Explain”
Principle in EU Capital Markets’ (2015) 5 Account Econ Law 233; Moore and Petrin, n 5 above,
58.
10 Of course, if the reasons for non-disclosure were not persuasive,the company would be subject to
the ire of shareholders, and therefore significant pressureto comply; in theor y, though, a credible
explanation would satisfy shareholders and allow the company to remain in non-compliance.
11 n 1 above, para 3.10.
12 ibid, para 1.10. See, also, S. Arcot, V. Bruno and A. Faure-Grimaud, ‘Corporate Gover-
nance in the UK: Is the Comply or Explain Approach Working?’ 2009, 2 at http://ssrn.com/
abstract=1532290 (unless otherwise stated, all URLs were last accessed 20 November 2018).
13 Committee on Corporate Governance, Final Report (London: Gee Publishing, 1998) (Hampel
Report).
14 Study Group on Directors’ Remuneration, Directors’ Remuneration: Report of a Study Group chaired
by Sir Richard Greenbury (London: Gee Publishing, 1995).
15 n 13 above, paras 1.11 and 1.12.
694 C2019 The Author. The Modern Law Review C2019 The Moder n LawReview Limited.
(2019) 82(4) MLR 692–726
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