Evolution of Company Law, Corporate Governance Codes and the Principle of Comply or Explain - A Critical Review
Jan Bertil Andersson
Jonkoping University, Jonkoping International Business School (JIBS) - Department of Commercial Law
June 22, 2011
Published in The European Financial Market in Transition, Hanne Birkmose, Mette Neville & Karsten Engsig Sørensen (eds.), Kluwer Law International, 2011
Nordic & European Company Law Working Paper No. 10-19
The CGC development around the world and particular so in the EU has been praised many times by many – academics, practitioners, investors and businessmen alike. However, the positive aspect of the development and use of CGC and the use of the principle of comply or explain should not shadow the negative or possible not so positive effects of CGC in states and the use of the principle of comply or explain.
One might believe that the development of CGC directly or indirectly must have a positive effect on the development of company law. This might be true, at least to some extent. However, it may also be that some aspects related to CGC and its development may negatively affect the development of company law. Thus, one should be careful not to have a somewhat overly positive view on CGC’s and what CGC’s can accomplish in the form of better corporate governance and a somewhat overly negative view on legislation as a device to accomplish a likewise better corporate governance.
Another discussion in the European setting has been the importance the actors involved in the development of CGC’s attribute to the mere fact that a CGC is published and applied by public noted companies (with in their view positive, corporate governance improving rules). There is reason to doubt if the CGCs at least in Europe are appreciated by the market to the same extent as some of the market actors want us to believe they are. Furthermore, an often overlooked dimension of CGCs is the costs associated with applying them. Any economic evaluation of CGCs should be between CGCs’ positive effects for corporate governance and the resulting economic outcome compared with the costs associated with applying the same package of rules.
The principle of comply or explain has many advantages. But there are also some drawbacks. Firstly, whenever a company declares it follows rules in the CGC this might actually not be the case in reality and there are indications that these might be a more common problem than one at first may envisage. Secondly, the explain component of the principle of comply or explain does certainly need to be improved substantially and just a requirement for detailed explanation is not good enough. There is clear empirical research which indicates that many explanations are unsatisfactory to say at least. A solution might be to require companies which are departing from the recommendations of a CGC to provide a justified and understandable explanation to the departure and the alternative solution adopted. Thirdly, the principle of comply or explain is in some countries applied with no or almost no sanction attached to it.
Number of Pages in PDF File: 18
Keywords: corporate governance codes, comply or explain
JEL Classification: K22working papers series
Date posted: June 22, 2011 ; Last revised: January 29, 2013
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