4.7.2 Summary of answers to key questions

A summary of the answers to the key questions is provided below. A choice was made not to provide a summary per key question or per country under research, but to provide a more general enumeration of the key findings of interest as regards the answering of the research question and to elaborate upon further in the underlying research.

The comply or explain principle is related to and was developed simultaneously with the corporate governance codes that, as regards the countries under research, were developed for two main reasons. Some countries genuinely wanted to improve the corporate governance structure of their companies, often after scandals had occurred. Others used the code (partly) as a marketing instrument to enhance their competitive position and to show their (international) investors that their corporate governance was in line with the international best practices. Notwithstanding the fact that this is only the beginning; the reasons for drafting a corporate governance code affect the other features. With respect to the code's aim, again competitiveness and internationally recognized standards are of importance, above all in supporting long-term value creation.

Over the years, in all the countries under research, codes were redrafted, renewed or modified at least once, which overall resulted in an increase in size; hence, more provisions to which the comply or explain principle is applicable. Moreover, the codes gained detail, although differences can still be seen across the countries. The Belgian and Dutch codes are very detailed whilst the UK code is not. The explanation for the Netherlands is that the previous code was not complied with sufficiently and it was decided to self-regulate the corporate governance practices rather than legislate further. In the case of Belgium, the explanatory guidelines and the appendices make the code extra detailed, which may partly be due to the high uncertainty avoidance score. The UK scores low on the uncertainty avoidance index and specific topics discussed in separate codes (such as the institutional shareholders in the Stewardship Code). Whether size and detail matter for the level of compliance is discussed further below (chapter 5).

The board is definitely the main topic of the codes of the countries under research. After the scandals and the financial crises, the board's functioning and structure needed to be improved. For some countries a special focus can be seen, such as on the supervisory board members or non-executives and their independence. At first glance it is remarkable that the compliance studies show that precisely the provisions on the board are often the provisions complied with worst of all. A possible explanation is that most provisions deal with the board and they are often the most innovative (e.g. on remuneration, appointment period and severance payments).

As a result of Directive 2006/46/EC, a listed company must include a corporate governance statement in its annual report and, in so far as it departs from the applicable corporate governance code, an explanation as to which parts it departs from and the reasons for doing so. The Member States had to bring into force the laws, regulations and administrative provisions necessary to implement this directive by 5 September 2008 at the latest. Or, rephrased, the Member States had to embed the national corporate governance code and the comply or explain principle in their legislation or regulations. The judicial corporate governance arrangement of pure self-regulation is no longer allowed since 5 September 2008. Hence, self-regulation supported by non-statutory rules (the UK), self-regulation supported by statutory rules (Belgium, Italy and the Netherlands) or regulation of self-regulation (Germany) remain the options. In Germany the discussion lingers as to whether the legal embedding of the self-regulation code is possibly in contradiction with the constitution (the Demokratieprinzip), although the code provisions are a repetition of legislation, with an explanatory nature (meta-regulation). Belgium and Italy switched, rather late, from self-regulation to self-regulation supported by statutory rules. The UK and the Netherlands were front-runners with respect to self-regulation supported by listing rules, respectively supported self-regulation by legislation through an administrative order. Some countries hardly needed to make amendments to their legislation and regulations and implemented the directive in time before 5 September 2008 (United Kingdom, Netherlands, Germany), others were slightly late (Italy - 6 November 2008 (Gazzetta Ufficiale delle Repubblica Italiana 260, 2008)) or very late (Belgium - 6 June 2010 (Belgisch Staatsblad 2010, 39622-39699) (Belgisch Staatsblad 2010, 22709-22719)). It is remarkable that the UK did not implement the directive by legislation but by regulation (listing rules), as is apparent from article 5 of the directive.

The directive imposes disclosure ofthe corporate governance statement as part of the annual report. Some interesting differences among the countries under research can be seen, which provoke a discussion about the best manner of disclosure. Belgian listed companies have to disclose two corporate governance documents: (i) the corporate governance charter and (ii) the corporate governance statement (Belgian Code 2009, Preamble). In general the charter describes the main aspects of the corporate governance policy and the statement provides more factual information, i.a. relating to code compliance, the reasons for non-compliance and the remuneration report. Other Member States normally combine these two types of information in one text related to corporate governance. Although possibly resulting in repetition and more text, such a separation makes it easier to detect the code provisions not complied with. On the other hand, providing the relevant text with a title such as ' provisions not complied with' and a reference to the provisions concerned also suffices. Germany has some disclosure specifics as well: the corporate governance statement should be placed on the company's website for five years and is also aimed at future compliance, since investors are more interested in future aspects than in history. Discussing future code compliance as well is preferable, on the other hand the annual report is a history-based document and future code compliance is an intention; during the year to come changes are possible. A last remarkable disclosure feature is Italian. In Italy model tables as promoted by the "Italian Handbook on Corporate Governance Reports" are common practice. In the blank spaces of these tables the company can indicate whether it complies or not and, if not, the reason why. The first table concerns the board of director's structure and the board's committees. The second table concerns the requirements regarding the board of auditors and the last compliance table sums up the code guidelines on various topics. Unfortunately, it is not clear which parts of the tables are linked to which code provisions. Moreover, not all code provisions are integrated in the tables, which possibly results in the failure to mention the code provisions not complied with, that are not integrated in the tables. Hence, despite all the above initiatives, an enumeration with references to the provisions not complied with remains the most sufficient method, while not neglecting the fact that improvements must continue to be sought.

The accountability (or in other words responsibility or even liability) for the corporate governance statement and comply or explain principle remains a difficult topic. On 22 April 2004, the EU Directorate General for Internal Market and Services launched an on-line consultation on i.a. the clarification of board members' responsibility for drawing up financial statements and key non-financial information and the introduction of a corporate governance statement. The consultation closed on 4 June 2004 and there was no support for a definition of the term 'responsibility' at European level; it would be too difficult to reach a community-wide definition. However, many respondents were in favour of ensuring that board members' responsibility for key non-financial information should also include the corporate governance statement and the risk management system. Hence, article 2(8) of the directive states that the Member States must ensure that the members of the administrative, management and supervisory boards collectively have the duty to ensure that the corporate governance statement is drawn up and published in accordance with the directive and that their laws, regulations and administrative provisions on liability apply to a breach of this duty. The Member States should therefore have rules on board liability that also apply to the publishing of the corporate governance statements, but no conditions with regard to contents are provided. Although it is understandable that more detailed rules on responsibility could not be formulated, the discussion lingers in several countries. Generally the countries state that the director's responsibility is already reflected in law and no further implementation of the directive is necessary in this respect. A point of ambiguity remains whether a false statement resulting in misleading information can give cause to liability. Some claim that the code recommendations have a non-binding leading character which cannot be cause for liability at all. As is already the case in Germany and the Netherlands, jurisprudence will probably clarify these issues further.

The comply or explain principle is a way of checking the code compliance of the companies involved. Material code compliance is difficult to monitor. But supervision on formal code compliance can be performed with the help of the corporate governance statement. It is first believed that market forces will result in adoption of the code. Companies not complying or explaining risk under-pricing of their shares, since shareholders should be willing to pay more for shares of companies with a proper corporate governance structure. For all five countries under research, the shareholders are the first line of supervisors, both of formal and material code compliance. They should consider the explanations in case of non-compliance and be prepared to enter into dialogue, exert pressure when the explanation is not acceptable or, as a final remedy, take legal action. Especially the block holders, institutional shareholders or shareholders acting in concert (often represented by a shareholder organisation) ought to exercise their rights during the annual shareholders' meeting. Unfortunately shareholders only act when a breach is serious enough or when the company is performing badly. In addition, they try to free-ride; performing supervision takes time and is costly. Due to this lack of supervision, with the exception of Germany the other four countries under research have an external supervisor of code compliance. In the UK the Financial Services Authority can impose fines and file actions that eventually can lead to delisting. In Belgium the Banking Finance and Insurance Commission can invite companies to adhere to the code and in Italy the CONSOB can impose disciplinary measures. The Netherlands Authority for the Financial Markets can ask for additional information, recommend an announcement or submit a request to the court. Some of these organisations have somewhat weak instruments at their disposal and, where possible, prefer not to use their disciplinary powers. At first glance a lack of formal public enforcement seems to exists, which possibly is not that serious because up till now the compliance rates are quite high and public enforcement also has a precautionary function. Since the corporate governance statement is part of the annual report (or the corporate governance statement is referred to within the annual report) and the directive claims, in article 1(7), that the statutory auditor shall check that the corporate governance statement has been provided, the statutory auditor can be considered a supervisor of formal code compliance as well. To be comprehensive, in some countries other organisations - although not supervisors - play a key role in the discussion on code compliance as well, such as the Financial Reporting Council in the UK, the Dutch Corporate Governance Code Monitoring Committee and the German and Dutch courts. Their compliance studies, consultations and judgments will hopefully contribute to an application of the comply or explain principle as intended. To summarise, supervision of code compliance is performed by three parties (shareholders, the statutory auditor and an assigned authority). Means of pressure and sanction instruments are present but a restraint in their use is visible and it is first believed that market forces will result in the adoption of the codes.

Reaching code compliance is the goal to aim for, with the help of the tools discussed above (such supervision, accountability, disclosures and embedding). The empirical research in the underlying study (chapter 5) examines the code compliance of the five countries simultaneously. Obviously previous national studies have also been performed, although very different in focus, size and detail. Therefore only some tentative conclusions can be drawn from these studies. For all five countries, positive evolutions in code compliance can, in general, be seen, although some drawbacks must be pointed out. Sometimes a (temporary) slight decrease in compliance can be seen due to reduced attention to corporate governance or because the saturation point (maximum compliance rate to be achieved) has been reached. The reasons provided for non-compliance are often insufficient and sometimes formal and material code compliance differs (Italy). A relation between a company's size and compliance seems to exist. For all the countries a fixed set of often reoccurring deviations can still be seen: deviations from code provisions on independency, remuneration, appointment period and severance payments. The average number of deviations differs among the countries under research, but is possibly related to the level of detail of the code or the fact that the provisions are not very innovative and a repetition of the applicable legislation. To actually underpin the above conclusions, more international research needs to be performed.