Consensus on the Comply or Explain principle (IVOR nr. 86) 2012/4.7.3:4.7.3 Optimum framework compared and specified

Consensus on the Comply or Explain principle (IVOR nr. 86) 2012/4.7.3

4.7.3 Optimum framework compared and specified

Documentgegevens:

mr. J.G.C.M. Galle, datum 12-04-2012

Datum: 12-04-2012
Auteur: mr. J.G.C.M. Galle
JCDI: JCDI:ADS365525:1
Vakgebied(en): Ondernemingsrecht (V)

In the answer to key question eight, all five countries under research are tested against the optimum framework of the comply or explain principle as formulated in section 4.1.2. Table 4.7.3 shows a summary of the results. The scores are determined as follows: zero point for a minus, one point for a plus/ minus and two points for a plus.

Table 4.7.3 Optimum framework scores compared
	Optimum framework	Scores					Total score
		UK	BEL	GER	IT	NL
I	Up-to-date national corporate governance code and comply or explain principle embedded in the national corporate governance system	+	+-	+	+-	+-	7
II	Clearness on which code provisions the comply or explain principle is applicable to and whether the corporate governance statement involves future and/or past code compliance	+	+	+-			5
III	A clear lay-out and manner of disclosure of the corporate governance statement			+-	+-	+-	5
IV	Monitoring of national code compliance	-	-	+	+-	+	5
V	Standing corporate governance committee	+	+	+	+	+	10
VI	Three-level supervision of code compliance	+	+	-	+	+	8
VII	Accountability rules for corporate governance statement and comply or explain principle	+-	+-	+-	+	+-	6
	Total score	10	9	9	9	9	46

In general, the total scores among the countries under research do not differ much and the plusses and plus/minuses have the majority. Nevertheless, improvements are necessary since the optimum score is fourteen, so still four or five points to gain. The scores per condition vary from 5 points to the optimal score of 10 points for a standing corporate governance committee. Hence, in practice there is as yet no convergence of the conditions necessary for the principle to work most effectively. Per condition below recommendations for improvements are made and the optimum framework is specified further to be able to provide concrete recommendations in chapter 6 regarding the necessary conditions to be put in place for the principle to work adequately.

Optimum framework
I Up-to-date national corporate governance code and comply or explain principle embedded in the national corporate governance system
The comply or explain principle can have an embedding in legislation or in listing rules. What is preferable depends on the country. If a culture of self-regulation and an active stock exchange authority with proper instruments is present in a country, embedding in listing rules is very well possible (a weak uncertainty avoidance) (e.g. the UK). Otherwise, embedding in legislation is preferable to provide the necessary status to the comply or explain principle (e.g. Germany and Belgium).
An up-to-date national corporate governance code is of course a prerequisite. Nevertheless, the question remains as to what an up-to-date code entails. The release date is not definitive and perhaps an updated code is not necessary after every major event. In any case, there is a role here for the comply or explain principle itself that is highly effective in stimulating discussion and will perhaps pave the way for necessary changes in the code.

II Clarity on which code provisions the comply or explain principle is applicable to and whether the corporate governance statement involves future and/or past code compliance

At the beginning of the code it ought to be clarified which (sort of) provisions the comply or explain principle is applicable to. The comply or explain principle should apply to (a) designated or defined provision(s); it is not recommended that a specific word or phrase within the code's text implies this. Hence, ambiguity should be avoided and it should be clear whether the statement on code compliance concerns compliance in the previous financial year and/or the coming year. The latter should be clearly stated in the code's preamble and/or embedding. Not neglecting the fact that an annual report does discuss the past financial period, a corporate governance statement that gives information on future code compliance too is preferable, and in fact provides more valuable information to the shareholders than information on past compliance

III A clear lay-out and manner of disclosure of the corporate governance statement

The lay-out of the corporate governance statement must prevent any ambiguities. It should be easily detectable which specific code provisions are not complied with and for what reasons. The same applies to the disclosure of the corporate governance statement itself: no ambiguities about how, when, where and by whom

A corporate governance statement that is part of the annual report and is also published on the internet for a longer period is preferable. Moreover, with respect to the deviations a reference to the specific code provision should be compulsory. A lay-out with the deviations and their explanations arranged as a list is more reader-friendly than making the explanations part of a narrative.

IV Monitoring of national code compliance

Whether the code compliance and the explanations for deviations from the national code of the listed companies are sufficient ought to be monitored independently and annually to be able to update the code or acknowledge certain developments. In addition to the level of compliance, the specific deviations and reasons provided, a focus on the quality of the explanations is also of importance.

V Standing corporate governance committee

It is the task of the standing corporate governance committee to help ensure that the national corporate governance code is practicable and up-to-date and promotes code compliance. Taking into consideration that the code is based on self-regulation, the corporate governance committee is obviously a body independent of any government or listing authority.

VI Three-level supervision of code compliance

Supervision of code compliance is performed at three levels. As the first and most important supervisors, it is the task of the shareholders to perform formal and material supervision of code compliance by means of their shareholder rights. Since supervision takes time, is costly and free-riding occurs, two more levels of supervision are necessary. The statutory auditor performs supervision of formal code compliance based on the Directive. A third supervisor, preferably the stock exchange authority, performs formal supervision of code compliance by means of exerting pressure and if necessary using its instruments. The country's regulation ought to define clearly what is expected of the supervisors and what their means of pressure and sanction instruments are. Information on the actual use of their instruments (e.g. fines or delisting) must be easily available publicly.

VII Accountability rules for corporate governance statement and comply or explain principle

Whether more in general or specifically for the publishing of the corporate governance statement and comply or explain principle, accountability rules on board liability ought to be formulated and if necessary clarified further in jurisprudence. These rules do not need to be specifically formulated regarding the corporate governance statement, but it must be clear which rules are applicable and in what situation. As stated in Directive 2006/46/EC, it is up to the countries themselves to formulate these rules, but having them ought to be compulsory