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Since the explanation for non-compliance is the cornerstone of the comply or explain approach, authors are specifically calling on public enforcement authorities to take a more active role. (Lu 2021; Hooghiemstra 2012;) Some researchers have found that there are certain qualities of corporations that are associated with higher and lower levels of high-quality non-compliance explanations (2.4). Studies conducted in
Germany, Italy and the Netherlands give insights into which qualities often indicate high-quality non-compliance explanations (Talaulicar and Werder 2008); Hooghiemstra 2012; Lepore et al. 2018). These insights could be useful to stakeholders wanting to monitor compliance and to public enforcement authorities if they are tasked with more stringent supervision.
224:
2008), Greece (Nerantzidis 2015), Italy (Lepore et al. 2018) and the
Netherlands (Hooghiemstra 2012; Monitoring Commissie Corporate Governance Code 2020) studies find that explanations for non-compliance with corporate governance codes are often inadequate. Similar results are found when studying non-compliance explanations in the realm of European non-financial reporting (Björklund 2021; Monciardini et al. 2020; Szabó and Sørensen 2015; Boiral 2013). This collection of research indicates that possible high levels of ‘compliance’ with corporate governance codes and non-financial reporting requirements are in fact much lower due to the large percentage of inadequate explanations.
24:
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The main drawbacks are that material compliance is difficult to enforce, an overemphasis on ‘tick-the-box’ compliance and, most prominently, that corporations give perfunctory explanations for non-compliance. (Ho 2012; Galle 2014; Abma and
Olaerts 2012) The lack of meaningful explanations is seen as
150:
The purpose of "comply or explain" is to "let the market decide" whether a set of standards is appropriate for individual companies. Since a company may deviate from the standard, this approach rejects the view that "one size fits all", but because of the requirement of disclosure of explanations to
232:
Due to the drawbacks to the comply or explain approach, several studies have proposed that an increased level of (public) enforcement and supervision is necessary in order to monitor inadequate explanations of non-compliance. (Lu 2021; Hooghiemstra 2012; Keay 2014; Seidl et al. 2013; Boiral 2013).
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Many studies point to the low quality of explanations given in comply or explain mechanisms in corporate governance and non-financial reporting regulations (MacNeil and Li 2006; Cuomo et al 2016; FRC 2021). In the UK (MacNeil and Li 2006; Shrives and
Brennan 2015), Germany (Talaulicar and Werder
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market investors, anticipates that if investors do not accept a company's explanations, then they will sell their shares, hence creating a "market sanction", rather than a legal one. The concept was first introduced after the recommendations of the
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The main benefits are that the approach offers flexibility to corporations, lowers their compliance burden, and stimulates discussion and for grounds in changes in legislation. (Ho 2017; Galle 2014; Abma and
Olaerts 2012; Lu 2021)
236:
The FRC has published guidance on "what constitutes an explanation" as a means of comparing the approach of those who prepare businesses' explanations with the expectations of those to whom they are addressed.
194:), companies must develop and publish a policy stating how voting rights operate and how shareholders are engaged in the running of the company, subject to the "comply or explain" principle.
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requirements expect companies to identify any code rules which they have not complied with, explain why they have not complied, and describe their alternative solution.
296:
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Galle, JGCM (2012). "Consensus on the comply or explain principle within the EU corporate governance framework: legal and empirical research".
616:
475:
456:. Proceedings of the 2021 International Conference on Social Science:Public Administration, Law and International Relations (SSPALIR 2021).
750:"The myth of the "good governance code": an analysis of the relationship between ownership structure and the comply-or-explain disclosure"
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41:
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88:
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147:) set out a code, which listed companies may either comply with, or if they do not comply, explain publicly why they do not.
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398:"Is the Comply or Explain Principle a Suitable Mechanism for Corporate Governance throughout the EU?: The Dutch Experience"
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1156:"Applying the 'comply-or-explain' principle: discursive legitimacy tactics with regard to codes of corporate governance"
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804:"What determines the informativeness of firms' explanations for deviations from the Dutch corporate governance code?"
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640:"A typology for exploring the quality of explanations for non-compliance with UK corporate governance regulations"
34:
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What constitutes an explanation under 'comply or explain'?, Report of discussions between companies and investors
56:
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and financial supervision. Rather than setting out binding laws, government regulators (in the UK, the
171:(or Deutscher Corporate Governance Kodex) and the Dutch Corporate Governance Code 'Code Tabaksblat' (
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committees and recommendations for how good companies should divide authority on their boards.
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851:"Het Monitoring Rapport Corporate Governance Code over boekjaar 2019: tijd voor vernieuwing?"
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Corporate governance: FRC report on what constitutes an explanation under comply or explain
1109:"Comply or explain in corporate governance codes: in need of greater regulatory oversight?"
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504:"The Emergence of 'Comply or Explain' as a Global Model for Corporate Governance Codes"
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Lepore, Luigi; Pisano, Sabrina; Di Vaio, Assunta; Alvino, Federico (1 October 2018).
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949:"Rethinking Non-Financial Reporting: A Blueprint for Structural Regulatory Changes"
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1060:"Sustainability reports as simulacra? A counter-account of A and A+ GRI reports"
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Cuomo, Francesca; Mallin, Christine; Zattoni, Alessandro (22 November 2015).
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Monciardini, David; Mähönen, Jukka Tapio; Tsagas, Georgina (1 July 2020).
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175:) use this approach in setting minimum standards for companies in their
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1008:"New EU Directive on the Disclosure of Non-Financial Information (CSR)"
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Corporate
Governance: The International Journal of Business in Society
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603:, Berlin, Heidelberg: Springer Berlin Heidelberg, 2013, p. 1144,
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Szabó, Dániel
Gergely; Sørensen, Karsten Engsig (1 January 2015).
700:"Patterns of Compliance with the German Corporate Governance Code"
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Seidl, David; Sanderson, Paul; Roberts, John (13 January 2012).
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898:"D. Die Sicherungsverwahrung – de lege lata et de lege ferenda"
333:"'Comply or Explain' and the Future of Nonfinancial Reporting"
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Advances in Social
Science, Education and Humanities Research
597:"Financial Reporting Council (FRC) Review of Combined Code"
259:"Measuring the quality of the "comply or explain" approach"
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551:"Corporate Governance Codes: A Review and Research Agenda"
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Benefits and drawbacks of the Comply or
Explain approach
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Under the revised Shareholder Rights Directive of 2017 (
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Macneil, Iain; Esser, Irene-Marié (1 February 2022).
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Shrives, Philip J.; Brennan, Niamh M. (March 2015).
48:. Unsourced material may be challenged and removed.
1064:Accounting, Auditing & Accountability Journal
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450:"The Value of the "Comply or Explain" Principle"
396:Olaerts, Mieke; Abma, Rients (21 January 2012).
698:Talaulicar, Till; v. Werder, Axel (July 2008).
601:Encyclopedia of Corporate Social Responsibility
202:The approach has both benefits and drawbacks.
704:Corporate Governance: An International Review
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460:. Paris, France: Atlantis Press.
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855:Maandblad voor Ondernemingsrecht
808:Accounting and Business Research
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165:UK Corporate Governance Code
467:10.2991/assehr.k.210916.005
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263:Managerial Auditing Journal
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849:Rietveld, S. (May 2021).
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