3.2.3 Spread of comply or explain principle in different judicial corporate arrangements across Europe

With the aim to be able to understand the application of the principle in practice, researched below, and as a prelude to chapter 4, the evolution of the comply or explain principle (including the expressed criticism) will be sketched in the remainder of this section in connection with the judicial arrangements stated in figure 3.2.2a. As stated in chapter 1, the Cadbury report can be considered the first corporate governance code and simultaneously the first code that contained the comply or explain principle: "We recommend that listed companies reporting in respect of years ending after 30 June 1993 should state in the report and accounts whether they comply with the Code and identify and give reasons for any areas ofnon-compliance. The London Stock exchange intends to require such statement as one of its continuing listing obligations" (Cadbury Report 1992,

The Cadbury report was drafted by the Committee on the Financial Aspects of Corporate Governance under the chairmanship of Sir Adrian Cadbury. The establishment of this committee was an initiative of the UK Financial Reporting Council, the London Stock Exchange and the accountancy profession and consisted, among others, of finance directors, academia, accountancy professionals and institutional investors. In its interim report of May 1992 the committee already stressed that compliance with the corporate governance code should be part of the listing requirements for the Stock Exchange. This proposal was met with a lot of criticism, but was nevertheless implemented in the final Cadbury report of December 1992 (Jones and Pollitt 2004, p. 167). The report stated that: "The obligation will be enforced in the same way as all other listing obligations. This may include, in appropriate cases, the publication of a formal statement of censure" (Cadbury Report 1992, 1.3).

Critics stated that due to the voluntary compliance, the self-regulation and the comply or explain principle the code had a lack of teeth and was a typically British compromise; well-meaning, reasonable, intelligent and worthless (Boyd 1996, p. 172). The committee itself stated that it chose i.a. for voluntary compliance because it believed that: "statutory measures would impose a minimum standard and there would be a greater risk of boards complying with the letter, rather than with the spirit of their requirements" (Cadbury Report 1992, I.10). As proposed by the Cadbury committee, the comply or explain statement became part of the listing rules. The current listing rule 9.8.6R states:

The UK, the first country to apply the comply or explain statement, has a judicial corporate governance arrangement of self-regulation supported by non-statutory rules; compliance with the material norms in codes is supported by listing rules, which makes compliance with these norms not entirely voluntary (Voogsgeerd 2006, p. 22). Originating in the UK, the comply or explain principle spread across Europe. The rationale behind the comply or explain principle itself remained, apart from some details, quite the same in other countries, but it was differently embedded in the various judicial systems, as already shown in figure 3.2.2a. For example, the Netherlands has chosen to embed the principle in legislation (arrangement C: self-regulation supported by statutory rules). Arrangement B (self-regulation supported by non-statutory norms) was chosen by countries such as the UK, where the comply or explain principle is embedded in listing rules and arrangement D (regulation of self-regulation) applies to Germany. More detail per country under review is provided in chapter 4. Subsequently, as described in chapter 1, the comply or explain principle was imposed in the EU by Directive 2006/46/EC.

The principle is embedded in different manners across Europe and each country has positioned itself somewhere on the continuum between self-regulation and legislation, but the rationale behind the principle remains more or less the same, as well as the underlying theories (legitimacy theory, market failure and disclosure). The differences that exist, for instance in the manner of embedding or the application of the principle in practice are affected by cultural dimensions as discussed further in section 3.3.