Abstract
The comply-or-explain principle is a central element in the EU corporate governance framework that was put in place by Directive 2006/46/EC. While avoiding an inflexible ‘one size fits all’ approach, the principle has lately been questioned because of the quality of corporate governance reports it has allowed European companies to produce; these companies can either comply with code provisions, or may explain why they do not comply, that is, why they deviate from a provision of the code. Seidl et al, in analyzing 257 listed companies that had produced some 715 records of deviations, and their respective ‘explanations’, found that, in contrast to the original idea of comply-or-explain, which emphasized the possibility of justifying deviations with situation-specific reasons, a significant number of the deviations analyzed were either not justified at all (that is, they were simply disclosed) or were justified on the basis of objections of principle (for example, that the code provisions were inappropriate because they failed to embody best practice). An increasing number of studies provide evidence that corporate governance statements disclosed on European stock markets lack quality, mainly in terms of the explanations they include when the companies do not comply with code provisions. In addressing this issue, the European Commission launched a wide-ranging consultation seeking views on how the ‘explain’ approach could be improved. From this consultation we analyzed 244 stakeholders’ responses, generating an empirically derived taxonomy of responses. First, we examine these by providing a descriptive account of the different ways in which stakeholders agree that the ‘explain’ option should be used, and what kind of alternative solutions companies should disclose. Second, we discuss the possible implications for code regimes and for management control.
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Notes
The European Commission Feedback Statement (European Commission, 2011b) includes 409 views that were received on the questions raised. However, when we downloaded all individual answers from the European Commissions’ website the number of answers counted comprised 408 respondents. The reason for this is that one answer was counted twice by the Commission.
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Acknowledgements
This article draws on data collected for ‘Comply, or explain better! A qualitative study of how the explanations of deviations from corporate governance codes in the EU can be improved’, which was performed by Sofia Josefsson and Marie Wallman. The study was submitted at the Jönköping International Business School as master’s thesis and was supervised by Petra Inwinkl.
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Inwinkl, P., Josefsson, S. & Wallman, M. The comply-or-explain principle: Stakeholders’ views on how to improve the ‘explain’ approach. Int J Discl Gov 12, 210–229 (2015). https://doi.org/10.1057/jdg.2014.6
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DOI: https://doi.org/10.1057/jdg.2014.6