Consensus on the Comply or Explain Principle within the EU Corporate Governance Framework: Legal and Empirical Research (Instituut voor Ondernemingsrecht nr. 86), 4.1.2 Research method

The theoretical aspects of the comply or explain principle are researched by means of answering eight key questions in a separate section per country. Together the answers give an overview of the comply or explain principle as embedded in the national corporate governance systems. Items such as the characteristics of national codes, the supervisors and disclosures are reflected in the eight key questions. To summarise, a comparative analysis of corporate governance on a micro level (Zweigert and Kotz 1998, p. 3) (Oderkerk 1999, p. 33) is performed for the five countries under review. The methodology used for this comparative legal analysis is a comparison based on the principle of functionality (Oderkerk 1999, p. 83) (Pintens 1998, p. 85). All five countries face the same 'problems' (how to improve the application of the comply or explain principle, i.e. better compliance and transparency), solve them by different means (hence the different judicial corporate governance arrangements), with often similar results (improved application of the comply or explain principle: more compliance and better transparency) (Zweigert and Kotz 1998, p. 4) (Oderkerk 1999, p. 87). Or in the wording of Pacces: different solutions with similar rules may explain discrepancies in national patterns of corporate governance, while similar solutions with different rules might provide the basis for understanding resemblances (Pacces 2007, p. 84).

The eight key questions to be answered are:

1. What is the background of corporate governance in the country under review?

2. What are the main features of the national corporate code regarding size, lay-out and subdivisions?

3. What are the main features of the national corporate code regarding contents and do they reflect the country s culture?

4. What is the judicial corporate governance arrangement in the country under review?

5. How is the disclosure of the corporate governance statement arranged and who is accountable for this disclosure?

6. Who are the supervisors of the compliance with the national corporate governance code and the comply or explain principle, and by what means do they perform supervision?

7. Based on literature and previous studies, how is the national corporate governance code applied with in practice?

8. What are the developments after having the comply or explain principle in place for several years? (Summary question)

For the comply or explain principle to work most efficiently certain conditions within a national corporate governance system need to be met. Although within the EU corporate governance framework several necessary conditions are already regulated, the EU countries themselves also have to make some improvements. For example, as stated in the 2011 EU Green Paper, the informative quality of explanations in case of deviations from the national code is, in the majority of cases, not satisfactory and in many Member States monitoring of code compliance is insufficient (EU Green Paper 2011, p. 3). To come to arrive at an answer to the central research question and to test the five EU countries under research, this section presents an optimum framework (see table 4.1.2) with which a country should ideally comply. For now only a brief explanation per condition is provided and at the end of the legal comparison in this chapter the five EU countries under research are tested against the optimum to come at last to more specific recommendations for improvements in chapter 6: the optimum framework is then specified further to present a common understanding of the principle'sscope and the conditions that need to be put in place for it to work effectively. The current situation is taken into account when testing the framework and not perse the situation during the years of the empirical research (2005-2007).

Table 4.1.2 Optimum framework
Optimum framework
I Up-to-date national corporate governance code and comply or explain principle embedded in the national corporate governance system
This condition involves the must-have basis for a country and currently is part of the EU corporate governance framework. Based on Directive 2006/ 46/EC a Member State must have a national corporate governance code and listed companies are required to include a corporate governance statement in their annual report. The comply or explain principle can have an embedding in legislation or in listing rules.
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 to which provisions the comply or explain principle applies. Any ambiguity should be avoided and it should be clear whether the statement on code compliance concerns the previous financial year and/or the coming year. The more so as preamble 10 of Directive 2006/46/EC merely states that the statement should provide shareholders with information about the corporate governance practices actually applied.
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.
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.
V Standing corporate governance committee
It is the task of the standing corporate governance committee to ensure that the national corporate governance code is practicable and up-to-date and promotes code compliance.
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.
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 or assigned and if necessary clarified further in jurisprudence.

Section 4.2 starts with answering the key questions for the UK, thereafter Belgium, Germany, Italy and the Netherlands. The UK was the front-runner in the EU regarding corporate governance; it had the first national code and comply or explain principle in place and therefore this country is the first in line in this chapter, whilst in the remainder of this study the order in which the countries are placed is alphabetical.