What is "comply or explain"?

1. The Code sets out a number of "principles" followed by code provisions and recommended best practices. It is important to recognise that the code provisions and recommended best practices are not mandatory rules. The Exchange does not envisage a "one size fits all" approach. Deviations from code provisions are acceptable if the issuer considers there are more suitable ways for it to comply with the principles.
2. Therefore the Code permits greater flexibility than the Rules, reflecting that it is impractical to define in detail the behaviour necessary from all issuers to achieve good corporate governance. To avoid "box ticking", issuers must consider their own individual circumstances, the size and complexity of their operations and the nature of the risks and challenges they face. Where an issuer considers a more suitable alternative to a code provision exists, it should adopt it and give reasons. However, the issuer must explain to its shareholders why good corporate governance was achieved by means other than strict compliance with the code provision.
3. Shareholders should not consider departures from code provisions and recommended best practices as breaches. They should carefully consider and evaluate explanations given by issuers in the "comply or explain" process, taking into account the purpose of good corporate governance.
4. An informed, constructive dialogue between issuers and shareholders is important to improving corporate governance.