‘Comply or Explain’ in Belgium, Germany, Italy, the Netherlands and the UK: Insufficient Explanations and an Empirical Analysis

Abstract

This study analyses the level and quality of the application of the comply or explain principle for listed companies in Belgium, Germany, Italy, the Netherlands and the UK. Although the comply or explain principle has nowadays become a central element in the corporate governance of the EU, a common understanding of the scope and necessary conditions for it to work effectively has not yet been achieved. This study explains the comply or explain principle from the perspective of the economic theory (legitimacy theory and theory on market failure) and is the first study of the application of the principle in which consecutive years are analysed for multiple countries simultaneously with one research method. In previous research the quality of the explanations for the code provisions not complied with and the explanatory factors have often been overlooked, while these are the key elements of the current European debate. In this study 237 annual accounts for the years 2005-2007 are analysed for five countries. The results show that company size and the period of time the comply or explain principle has been applicable in a country predict the level and quality of compliance. Although the level of code compliance is high, the quality of the explanations for code provisions not complied with is insufficient. Further fine-tuning of the comply or explain principle is necessary to achieve the most effective application in order to make the principle work in practice as intended.

Keywords: Corporate Governance, code, comply or explain principle, compliance, disclosure

JEL Classification: G3