6.4.2 Readability of corporate governance statement fails

The companies under review must - based on Directive 2006/46/EC - have a section in their annual reports (or a separate report or a website page) which is assigned to the compliance with the applicable corporate governance code, i.e. the corporate governance statement. Article 1(7) of the directive discusses this corporate governance statement, although quite briefly: it solely states that a company shall include a corporate governance statement in its annual report in which it refers to the corporate governance code to which the company is subject, and/or gives an explanation regarding which parts of the corporate governance code it departs from and the reasons for doing so. The countries under review already had such rules in force in their laws, listing rules or corporate governance codes in the period under research in chapter 5 (20052007). Nevertheless, in 12 instances a corporate governance statement was not present and in 24 instances no attention whatsoever was found to have been paid to code compliance in the annual report. Although in 142 of the 711 corporate governance statements researched full code compliance is indicated, having no corporate governance statement and/or attention to code compliance is a serious issue (see Belgium and the Netherlands in table 6.4.2 below). Having a corporate governance statement in which attention is paid to code compliance is a principle requirement and hopefully not an issue anymore nowadays (anno 2012), although vigilance remains necessary.

The lay-out (or in other words: design) of those corporate governance statements in which the companies provide information on their code compliance differs between the countries and for the years researched. A little more standardisation in lay-out (NB: not in the reasons provided for deviations) would be useful. During the empirical research it was repeatedly unnecessarily difficult to ascertain which provisions were not complied with and for what reasons. As stated before (see sections 4.7.3 and 5.5.2), it is argued in the underlying research that deviations presented in a list with reference to the code provisions not complied with is preferable to avoid any ambiguities as much as possible and to make the statement more reader friendly. Within the dataset Germany and the Netherlands (64% and 48% - see table 6.4.2 above) show the most corporate governance statements with the preferred lay-out (list with reference). Italy scores the lowest by far on the preferred lay-out list with references, since it is common practice in Italy to give explanations, mostly without reference, in specially designed compliance tables, which is an issue to be improved. In the UK a narrative is standard practice which is quite obvious since, on average, 1.3 deviations per UK company were deduced, notwithstanding the fact that it is preferable that a deviation is mentioned separately and does not need to be derived from a substantial piece of text. Because of the rapidly changing and more and more extensive codes it is helpful for the users of the annual reports to be able to see clearly which code provisions are deviated from and for what reasons. List-wise explanations with reference to the relevant code provision are preferred and should become standard practice and standard format. To make this actually happen as soon as possible a 'top-down' approach is recommended. Directive 2006/46/EC needs to be amended to make the Member States add this extra requirement to their national regulation that embeds the comply or explain principle.

Recommendation 6: Directive 2006/46/EC needs to oblige the Member States to ensure that corporate governance statements with list-wise explanations and references to the relevant code provisions not complied with are published.