"Comply or Explain" Basics
What does the "comply or explain" principle mean?
Companies must either comply with governance codes or explain why they are not following them.
Why is flexibility an important consideration in corporate governance codes?
A "one-size-fits-all" approach doesn’t work because companies differ in size, structure, and organization.
Your country’s corporate governance code recommends that at least 30% of the board be independent directors. Your company is a family-run business with no external directors. What could be a reasonable explanation for non-compliance?
The company may argue that its family leadership ensures strong alignment with business goals and that external directors are not necessary for effective governance.
Which country was the first to introduce the "comply or explain" principle, and in which report?
United Kingdom, in the 1992 Cadbury Report
Some argue that flexibility in corporate governance codes improves financial performance. Others disagree. What is one argument against flexibility?
Too much flexibility may reduce accountability, leading to weaker governance and potential financial mismanagement.
The governance code recommends publishing an annual sustainability report, but your company argues that it’s too costly and time-consuming. What are two potential consequences of not complying?
What is the role of the capital market in the "comply or explain" principle?
The market monitors compliance and either (a) penalizes non-compliance (e.g., lower stock prices) or (b) accepts justifications based on company circumstances.
What is one advantage and one disadvantage of mandatory rules over the "comply or explain" approach? (20s)
Your company’s CEO is also the Chairman of the Board, but the governance code recommends separating the roles to prevent conflicts of interest. What are two possible reasons to explain non-compliance?