Comply or Explain: In Need of Greater Regulatory Oversight?

35 Pages Posted: 10 Sep 2012

See all articles by Andrew R. Keay

Andrew R. Keay

University of Leeds - School of Law

Date Written: September 10, 2012


Having a voluntary code as the basis of a corporate governance regime is popular in countries in Europe and around the world. Generally, at the heart of such an approach is the concept of 'comply or explain.' This concept originated in the UK with the Cadbury Report in 1992 and provides that a company is to comply with a set code of practice, but if it does not then it is to state that it does not and explain why it does not. The use of this concept is designed to permit flexibility in companies and it is in response to the fact that one size does not fit all as far as companies are concerned, as they are all different and should not be subject to rigid rules.

One of the critical aspects of many of the codes that embrace the comply or explain concept is that it is not the job of any regulatory body to assess what companies do or say in relation to the Code provisions. It is incumbent on the markets generally and the company’s shareholders specifically to determine whether the response of the company to Code provisions does enough, and then to take some action in order to force companies either to conform with the provisions (if they have not) or to explain why they have failed to do so. The idea is that those who are really interested in conformity should examine company statements and respond appropriately. Hence, the aim of the comply or explain principle is to empower shareholders to make an informed evaluation as to whether non-compliance is justified, given the company’s circumstances.

The aim of the paper is to assess whether the present scheme which relies on the stewardship of shareholders and the efficiency of the markets should continue, or whether a regulatory body should be empowered to determine whether companies are in fact complying with Code provisions or, if not, whether they are providing adequate explanations for not complying. To this end, the paper will examine the comply or explain concept and ascertain how effective it is. It will identify and discuss the shortcomings that exist with shareholder and market scrutiny of company statements. Also it will focus on the nature of the explanations that are given by companies when they do not comply with a particular requirement in the Code. Next, the paper will consider whether a regulatory body should be employed to enhance the corporate governance scheme and evaluate whether it would provide a better approach to that which exists at the moment. The paper will touch on the kind of sanctions that might be implemented if a regulatory body was to oversee comply or explain.

Keywords: comply or explain, corporate governance, regulation, voluntary codes, boards of directors

JEL Classification: G30, K20, K22, L20

Suggested Citation

Keay, Andrew R., Comply or Explain: In Need of Greater Regulatory Oversight? (September 10, 2012). Available at SSRN: or

Andrew R. Keay (Contact Author)

University of Leeds - School of Law ( email )

Corporate and Commercial Law
Leeds LS2 9JT
United Kingdom
0113-343-6389 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics