The U.K’s lead corporate regulator has launched a review of its Combined Code on Corporate Governance, which sets out the governance principles that listed companies are expected to follow.

One specific question the Financial Reporting Council will look at is whether the “comply or explain” approach, the cornerstone of the Code, is working well enough in the current financial crisis.

Under the comply or explain regime, companies do not have to comply with its principles, but they are required to explain any non-compliance.

The FRC’s last review of the Code in 2007 concluded that comply or explain was only working “reasonably well.” The regulator found concerns about the quality of the information companies were disclosing about governance and the ability of investors to ask questions about governance issues.

Since then, the financial crisis has taken hold and “As a result, the effectiveness of theCombined Code and the ‘comply or explain’ mechanism are being tested to a greater extent than under the previous, relatively benign conditions,” the FRC says.

It added that the comply or explain approach, “Requires boards to provide investors with the necessary information on which to make [a] judgment, and a sufficient number of investors to engage constructively with the companies in which they invest through dialogue and the use of their voting and other rights.”

That echoes comments made recently by the U.K’s financial regulator, the Financial Services Authority, which said investors needed to engage more actively with companies and should not take their disclosures at face value.

FRC chairman Sir Christopher Hogg said the review was not an admission that the Code was fundamentally flawed, or that better governance principles would have lessened the current crisis. “The time is now ripe for testing the Code’s content and application against the fresh thinking that the crisis must provoke,” he said.

Every aspect of the Code is up for review, but along with the comply or explain question the FRC is focusing on six specific areas: board effectiveness and composition; the roles of chairman, executive leadership, and non-executive directors; the board’s risk-management role; remuneration committees; the quality of the support and information available to the board and its committees; and the role of institutional shareholders.

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