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The comply-or-explain principle: Stakeholders’ views on how to improve the ‘explain’ approach

The comply-or-explain principle: Stakeholders’ views on how to improve the ‘explain’ approach 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Disclosure and Governance Springer Journals

The comply-or-explain principle: Stakeholders’ views on how to improve the ‘explain’ approach

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References (59)

Publisher
Springer Journals
Copyright
Copyright © 2014 by Palgrave Macmillan, a division of Macmillan Publishers Ltd
Subject
Business and Management; Business and Management, general; Accounting/Auditing; Corporate Finance; Corporate Governance
ISSN
1741-3591
eISSN
1746-6539
DOI
10.1057/jdg.2014.6
Publisher site
See Article on Publisher Site

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.

Journal

International Journal of Disclosure and GovernanceSpringer Journals

Published: May 22, 2014

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