7.2.1 Summary Part I Research Setting

Part I consists of chapters 1 to 3 in which the research setting or theoretical framework is outlined. Chapter 1 describes the research questions and the outline of the research. Moreover, the drivers behind the EU corporate governance developments and the comply or explain principle itself are clarified further; (i) restoring the investor's confidence, (ii) establishing one single EU market and improving the competitiveness of EU companies, and (iii) developing a modern regulatory framework in the EU for company law. It was believed in the EU that what constitutes good corporate governance is continually evolving and 'one size does not fit all'. Soft regulation by means of national corporate governance codes, together with the comply or explain principle, was therefore opted for. In 2006 this approach was confirmed by Directive 2006/46/EC, imposing that a listed company must include a corporate governance statement in its annual report which refers to the corporate governance code the company is subject to and also explains which parts of the code are deviated from and for what reasons. Chapter 1 further elaborates in detail upon the contents of Directive 2006/46/EC. Although, due to its vague wording as regards some points, the Directive establishes ambiguity in its implementation, it made the comply or explain principle even more of a central element of EU corporate governance. In chapter 1 the strengths and weaknesses of the comply or explain principle are discussed further and acknowledged. In short, the principle's strengths are stimulating discussion and paving the way for changes in legislation, flexibility, 'made to measure' compliance, monitoring and bench-marking by the capital markets, and transparency and accountability of directors towards shareholders. Its weaknesses to be overcome are that material code compliance is hard to monitor, only ex post supervision by shareholders seems possible, regulatory creep lurks, as well as overemphasis on compliance instead of a deeper analysis of 'made to measure' deviations. The convergence debate and the different corporate governance schools are addressed in chapter 1, since the role, defining and future of the EU corporate governance framework and also the comply or explain principle is still under debate. In this study a conversion into one standard and superior corporate governance model is not believed in, since the diversity school is adhered to. Due to path dependence, differentiation in types of firms, shareholder strategies and specific agency problems, national systems will evolve further in line with their cultural and historical features and it is believed that attempts to create a 'one size fits' all model will fail. Therefore, an improved variety of governance systems based on national cross-references is argued for; the different systems will improve by learning from each other. Up till now an international overview of the application of the comply or explain principle in practice covering a period of more than one year has not existed. Therefore the objectives and simultaneously the relevance of this research can be expressed as: providing an international overview of the application of the comply or explain principle to find out whether, in theory and practice, convergence exists and culture matters, in order to provide recommendations on how to reach a common understanding of the comply or explain principle's scope and most effective form within the EU corporate governance framework (in practice and in regulation (Directive 2006/46/EC)).

Chapter 2 discusses the theoretical framework of corporate governance and the comply or explain principle. Based on economical and legal theory combined, a multidisciplinary overview is provided of the theories that influence or even (partly) clarify the existence and developments of these two concepts. This theoretical framework is required to understand and, during the research, further build upon the comply or explain principle, as applied in practice, in part II of the underlying research. In straightforward language, firms came into existence to reduce transaction costs and create synergy. Because of efficiency the separation of ownership (shareholders) and control (management) became inevitable at a certain point in time. This separation caused a differentiation of interests of the parties concerned (e.g. the shareholders versus the board or minority shareholders, or the firm versus contracting parties), which resulted in agency problems and costs. To keep the balance within the company, the hard to define concept of corporate governance is of relevance, which is influenced by several theories, the importance of which changed over time (e.g. nowadays the classical agency theory and transaction costs theory seem to have less influence compared to the more current stewardship theory and stakeholder or shareholder theory). The coherence between the theories discussed not only influences the concepts of corporate governance and comply or explain, but simultaneously the contents of national corporate governance codes and their application in practice by means of the comply or explain principle, as researched further. Within the concept of corporate governance several 'remedies' were developed to prevent or reduce the agency problems and costs (e.g. alignment, disclosure and monitoring). These economical remedies can be translated into legal strategies, the execution of which is laid down in corporate legislation, regulation or contracts for the purpose of solving and preventing agency problems; hence a convergence of law and economics. The national corporate governance codes and also the comply or explain principle (disclosure) are in fact examples of economical remedies translated into legal strategies. A corporate governance code should take all the agency relations and problems into account (agency theory), whilst acknowledging and rewarding trustworthiness of its stewards (stewardship theory), and not neglecting the fact that an adequate corporate governance system also functions as a mechanism against incomplete contracts (transactions costs theory) between the shareholders and stakeholders involved (stakeholder and shareholder theory). Due to developments such as scandals, cultural features and the national legal system, not all the theories above are always simultaneously taken into account. Sometimes specific theories of influence when a national corporate governance code is drafted are overemphasised. Of course culture and, at times, the necessity for a certain focus must not be neglected, but a balance as outlined above should be aimed for.

Furthermore, chapter 2 explains that the comply or explain principle, whilst enhancing the 'one size does not fit all' and 'made to measure' approach, theoretically is a variation of the disclosure remedy and is influenced by the legitimacy theory and the theory on market failure. As a remedy, disclosure hopes to avoid information asymmetry and, as a consequence thereof, reduce opportunistic behaviour that results in agency costs. The corporate governance statement and the comply or explain principle are disclosures as such. Companies want to disclose their corporate governance information as they seek to be legitimised by society: an organisation seeks approval from society to guarantee its continued existence. Moreover, the information asymmetry to be avoided can result in market failure, hence again it is essential that code compliance be disclosed by means of the comply or explain principle. Chapter 2 helps to provide an understanding of the theoretical 'background' of corporate governance and the comply or explain principle, which must be taken into account when formulating recommendations regarding the conditions that must be put in place in order for the comply or explain principle to work adequately in practice.

Chapter 3 reviews how corporate governance codes and the comply or explain principle can be qualified legally and in what manner it is believed that cultural patterns influence the application of the principle. The purpose thereof is to be able to study the comply or explain principle as used in practice more in depth and more comprehensively in Part II. First, the aim is to provide a legal qualification for corporate governance codes and the comply or explain principle in the five countries under research, i.e. the UK, Belgium, German, Italy and the Netherlands. This qualification, however, differs per country and code, even per code provision and there is no agreement in legal doctrine. In the underlying research it is believed that, in general, regulation in codes can be considered law whenever these rules are in line with the applicable legislation or derivable from legal sources (legislation, custom, jurisprudence, treaty and legal principles). Nevertheless, in the end it remains the responsibility of the courts to decide what is considered law and codes remain a dynamic and changeable collection of norms and values. It is far more relevant to actual practice to make a distinction between judicial corporate governance arrangements, since apparently a 'classical' legal arrangement such as legislation is not suitable. Corporate governance codes can be considered new judicial arrangements that are strengthened by the accountability managers have to provide to their stakeholders by means of the comply or explain principle. The judicial corporate governance arrangements involve the code itself, as an instrument (of which the comply or explain principle is part), but also the environment in which it functions, the actors involved and their balance of powers (Voogsgeerd 2006).

Chapter 3 elaborates upon the five judicial corporate governance arrangements A to E as derived from Wymeersch and Voogsgeerd (Voogsgeerd 2006) (Wymeersch 2005). Of relevance are the categories B to D. Category B is applicable to the UK, where the legal embedding of the code and comply or explain principle is laid down in listing rules; the code and principle are supported by non-statutory norms. In the case of Belgium, Italy and the Netherlands judicial corporate governance arrangement C applies, where the code and comply or explain principle are supported by or have an embedding in legislation. Germany applies judicial corporate governance arrangement D, referred to as metaregulation: although the code is embedded in legislation it is of no real importance since the emphasis lies on detailed national regulation. Chapter 3 emphasises that these judicial arrangements and also the application of the comply or explain principle in practice are influenced by culture, which can be regarded as an all-embracing factor that incorporates others (e.g. economical, legal and political factors). The concept of culture is explained and for the five countries under research the relevant cultural dimensions as defined by Hofstede are elaborated upon further (Hofstede, Hofstede et al. 2011). Similar cultural dimensions enhance convergence in corporate governance, apart from the situation in which a country has certain specific predominant cultural dimensions. Therefore, chapter 3 argues that when performing international studies on corporate governance, the cultural dimensions that have such strong effects on the judicial corporate governance arrangements should be taken into account as well. A comparative analysis of corporate governance should consist of more than one research method involving several disciplines. Hence, in Part II of the research, theoretical and empirical methods are combined whilst taking the disciplines law, economics and culture into account.