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In a time of strong calls for tighter compliance, Wim Van der Stede, CIMA’s (Chartered Institute of Management Accountants) professor of accounting and financial management at the London School of Economics, argues that regulation must remain principles based. He cautioned regulators against issuing over-prescriptive and excessive regulation, and alerted global business about the pitfalls of mere compliance driven reporting.

Professor Van der Stede says that to help curb economic failure, businesses must have the flexibility to tell the ‘story’ of their organisation, and ensure that a deeper understanding of their ethos and governance practices was communicated. He said that this would be critical to providing investors with the full picture of an organisation’s health, which in turn would contribute to value creation through disciplined accountability.

"In terms of governance, frameworks such as ‘comply or explain’ are superior to rigid mandatory compliance based regimes and the UK has been a leading authority in this regard," he explains. "But even this regulation has its limitations. There are concerns that many organisations opt to ‘comply’ rather than ‘explain’ as this can be easier and less costly than having to explain individual approaches to governance. As such, I’d argue that ‘comply or explain’ really only meets its true intent if seen as ‘explain and demonstrate."

"In line with this, companies would explain and demonstrate how their risk and governance practices are effective and shaped for real use rather than mostly comply through boilerplate reporting.

"Governance codes should provide minimal principles-based guidance based on best practice and companies would be required to make a reasoned case that their governance and risk systems and processes and actions are sensible and measured or ‘safe’ under plausible conditions."

Professor Van der Stede called for not more but better reporting, and explained how this would improve board and investor dialogue which in turn would encourage better governance practice.

He continued that the key is not to expect too much from regulatory-driven corporate reform if it fails to feature any change in behaviour. Instead, he advised that any sensible approach must involve, but not blindly trust, responsible issuers and vigilant users, and that this is where regulators should be firm in their requirement for disclosure but restrained in their prescription in order to find the right balance.

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