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Flexible or not? The comply-or-explain principle in UK and German corporate governance


Sanderson, Paul; Seidl, David; Roberts, John; Krieger, Bernhard (2010). Flexible or not? The comply-or-explain principle in UK and German corporate governance. Working Paper 407, University of Cambridge. Centre for Business Research.

Abstract

The current financial crisis has given rise to calls to toughen considerably the codes of corporate governance put in place in many countries to regulate corporate behaviour (e.g. the UK Combined Code). These codes vary slightly in form but tend to contain a mix of non-discretionary regulations and discretionary guidance and information. Almost all such codes embody some variation or other of the comply-or-explain principle. Companies should comply with the rules or explain why they do not. In this way the code framers avoid, or perhaps enable, a one-size-fits-all approach. It is this discretion that governments are under pressure to limit, but little is known about how it is used, in what circumstances, and to what effect? In this paper we report the findings of research carried out in the UK and Germany to investigate the extent to which large public companies comply with the rules, and the attitudes of company directors and legal counsel to using comply-or-explain. We find that positive conformance with codes depends on factors such as the extent to which regulatees are engaged in the formation and revision of the code, and thus feel a sense of ownership; the existence of interested and relevant monitors; and the extent to which soft regulation is a traditional means of control in a domain. We also found that pressure, both internal and external, both real and imagined, can lead to the establishment of a norm of full compliance, with perhaps perverse outcomes, and that in any event the majority of the contents of codes become akin to hard law, where deviation is not considered acceptable. There are however a very small number of rules where temporary deviation may be unavoidable from time to time and where non-compliance accompanied by a valid explanation is accepted.

Abstract

The current financial crisis has given rise to calls to toughen considerably the codes of corporate governance put in place in many countries to regulate corporate behaviour (e.g. the UK Combined Code). These codes vary slightly in form but tend to contain a mix of non-discretionary regulations and discretionary guidance and information. Almost all such codes embody some variation or other of the comply-or-explain principle. Companies should comply with the rules or explain why they do not. In this way the code framers avoid, or perhaps enable, a one-size-fits-all approach. It is this discretion that governments are under pressure to limit, but little is known about how it is used, in what circumstances, and to what effect? In this paper we report the findings of research carried out in the UK and Germany to investigate the extent to which large public companies comply with the rules, and the attitudes of company directors and legal counsel to using comply-or-explain. We find that positive conformance with codes depends on factors such as the extent to which regulatees are engaged in the formation and revision of the code, and thus feel a sense of ownership; the existence of interested and relevant monitors; and the extent to which soft regulation is a traditional means of control in a domain. We also found that pressure, both internal and external, both real and imagined, can lead to the establishment of a norm of full compliance, with perhaps perverse outcomes, and that in any event the majority of the contents of codes become akin to hard law, where deviation is not considered acceptable. There are however a very small number of rules where temporary deviation may be unavoidable from time to time and where non-compliance accompanied by a valid explanation is accepted.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:30 June 2010
Deposited On:28 Aug 2019 14:20
Last Modified:25 Sep 2019 00:42
Series Name:Working Paper
OA Status:Green
Other Identification Number:merlin-id:9063

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