What is the biggest difference between a comply or explain vs a comply or else governance methodology?
Comply or explain is a regulatory approach used in the United Kingdom, Germany, the Netherlands and other countries in the field of corporate governance and financial supervision. Rather than setting out binding laws, government regulators (in the UK, the Financial Reporting Council, in Germany, under the Aktiengesetz) set out a code, which listed companies may either comply with, or if they do not comply, explain publicly why they do not. The UK Corporate Governance Code, the German Corporate Governance Code (or Deutscher Corporate Governance Kodex) and the Dutch Corporate Governance Code 'Code Tabaksblat' (nl:code-Tabaksblat) use this approach in setting minimum standards for companies in their audit committees, remuneration committees and recommendations for how good companies should divide authority on their boards. Show
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 market investors, anticipates that if investors do not accept a company's explanations, then investors will sell their shares, hence creating a "market sanction", rather than a legal one. The concept was first introduced after the recommendations of the Cadbury Report of 1992. Benefits and drawbacks of the Comply or Explain approach[edit]The comply or explain approach has both benefits and drawbacks. The main benefits are that it offers flexibility to corporations, lowers their compliance burden, and stimulates discussion and for grounds in changes in legislation. (Ho 2012;[1] Galle 2014;[2] Abma and Olaerts 2012;[3] Lu 2021[4]) 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;[1] Galle 2014;[2] Abma and Olaerts 2012[3]) The lack of meaningful explanations is seen as the biggest drawback. Main Drawback: low quality of non-compliance explanations[edit]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;[5] Cuomo et al 2016;[6] FRC 2021[7]). In the UK (MacNeil and Li 2006;[5] Shrives and Brennan 2015[8]), Germany (Talaulicar and Werder 2008[9]), Greece (Nerantzidis 2015[10]), Italy (Lepore et al. 2018[11]) and the Netherlands (Hooghiemstra 2012;[12] Monitoring Commissie Corporate Governance Code 2020[13]) 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;[14] Monciardini et al. 2020;[15] Szabó and Sørensen 2015;[16] Boiral 2013[17]). 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. Enforcement and supervision of comply or explain[edit]Due to the drawbacks to the comply or explain approach multiple 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;[4] Hooghiemstra 2012;[12] Keay 2014;[18] Seidl et al. 2013;[19] Boiral 2013[17]). Since the explanations for non-compliance is the capstone of the comply or explain approach authors are specifically calling on public enforcement authorities to take a more active role. (Lu 2021;[4] Hooghiemstra 2012;[12]) 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[9]); Hooghiemstra 2012;[12] Lepore et al. 2018[11]). These insights could be useful to stakeholders wanting to monitor compliance and to public enforcement authorities if they are tasked with more stringent supervision.
See also[edit]
What is comply or else in corporate governance?Under the comply-or-else approach the regulators prescribe a set of rules which all companies are required to comply with. These rules are generally introduced through legal statues. If a company does not comply with the rules then the company is liable to be penalized by the regulator.
Why is the comply or explain approach successful?Good and strategic use of comply or explain is good governance. Using comply or explain effectively means that businesses can provide market-based solutions that are worked out between companies and their shareholders without the need for regulatory intervention.
What is the meaning of comply and approach?These codes are based on a “comply or explain” approach – which, plainly put, means that companies either comply with the principles and guidelines set out or explain why they have not.
What is meant by corporate governance and why is it important that companies should comply with relevant corporate governance requirements?Good corporate governance ensures that an organisation's board of directors meet regularly, retain control over the business and have clearly defined responsibilities. It also ensures a robust risk management system. Corporate governance is one of the cornerstones of any good business.
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