GLOBAL - The survival of the UK's 'comply or explain'-based corporate governance system, including the UK Stewardship and Corporate Governance Code, depends on investors playing their part in the system, according to the Financial Reporting Council (FRC).

Speaking at the recent Management, Governance and Regulation in the Changing Investor Landscape conference, Stephen Haddrill, chief executive at the FRC, said: "Investors have more rights and more potential influence in the UK system than in almost all other countries. If those rights and if that influence is not used, our defence of the system [in Brussels] would be damaged.

"We will see rules come in those circumstances, and regulators will take over the job of stewardship as they already do to some extent in the financial services sector. If investors want to preserve the current UK system, they must use it, or there is some serious risk of losing it."

One of the issues for the European Commission (EC) relates the quality of explanations where companies have decided not to comply with the Corporate Governance code.

Haddrill said: "If we have a 'comply or explain' system, the explanation does need to give the investor a proper sense of why the company has decided not to comply. In general, companies do give pretty good qualitative explanations, but that is not always true, which is why it is one of the things we will be reviewing this year to see whether explanations can be enhanced in some way."

But Haddrill added: "We are quite nervous about regulators getting involved in judging explanations. We must not be drawn into testing whether the explanation is good enough or not because that is a matter for shareholders to take decisions on."

This will be part of a more general review the FRC will be undertaking of both the UK Corporate Governance Code and the Stewardship Code.

The most controversial change to the Corporate Governance Code over the past year, according to Haddrill, was that all FTSE 350 company directors should be subject to annual re-election. The aim of annual re-election is to rebalance the relationship between owners and managers, increase the accountability of directors to their shareholders and act as an incentive to enhance engagement.

While the FRC does not think this would generate an incentive to behave in a short-term fashion, unlike some companies, it will look at the evidence accumulated over the last year to see whether there is any risk of that.

"In practice, there will not be a significant number of challenges to directors," said Haddrill.

The FRC has just completed a consultation on whether the Corporate Governance Code should be amended to take account of Lord Davies' recommendation that companies should publish their policies on gender diversity and make progress toward recruiting more women to senior roles.

It will formally announce its response to the consultation in October. Haddrill said stakeholders were broadly supportive of Lord Davies' proposals, although there was a range of views on the timing of changes to the code.

The FRC would also like to develop a set of metrics that determine the quality of engagement between investors and companies in relation to the Stewardship Code.

On a similar note, seven leading institutional investors in UK-listed companies have asked FTSE 350 chairmen to declare their aspirational goals for the representation of women on their boards in 2013 and 2015 by the end of this month.

In his report 'Women on Boards' earlier this year, Lord Davies of Abersoch called on the chairmen to disclose these goals by September. In a joint letter to each FTSE 350 chairman who has not yet published a statement, the investors said they were eager to understand plans and support progress on this important and topical issue.

The investor letter was signed by the following:

Abigail Herron, corporate governance manager at The Co-operative Asset Management Sue Round, director of investments at Ecclesiastical Investment Management Andy Evans, responsible investment adviser at Insight Investment Management Emma Howard Boyd, head of sustainable investment and governance at Jupiter Asset Management Helena Morrissey, chief executive at Newton Investment Management, Eric Van La Beck, head of responsible investment at the OFI Group Frank Curtiss, head of corporate governance at RPMI Railpen

Denise Wilson, non-executive director and member of the Davies Steering group, said: "Today, around a third of FTSE 100 chairmen have made a public statement of their goals. We expect many more to do so by the end of September.

"This letter shows there is strong investor interest in their response."