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

Since the Cadbury Report, UK corporate governance codes have a legal embedding. Although the Cadbury Report was self-regulation and not legally binding on boards, listed companies had to have a statement of compliance in their annual report discussing whether they complied or why not. The obligation to provide this statement of compliance was laid down in the London Stock Exchange Yellow Book with which quoted companies had to comply; in other words, the listing rules. This development formed the basis for the comply or explain approach in the UK (Solomon 2007, p. 54) and nowadays the complyor explain approach is even regarded as the trademark of corporate governance in the UK (UK Code 2010, p. 4). The latter UK codes as shown in figure 4.2.2 are also voluntary where compliance is concerned. In the UK this approach is preferred above legislation as is common practice for example in the US (Solomon 2007, p. 65). With respect to the contents of the code, the UK refuses to legislate the norms of the code since no consensus exists regarding some definitions and trust in shareholder control (Voogsgeerd 2006, p. 40). This differs from some other countries under research (Belgium and Germany) where much of the code's contents is laid down in legislation.

Hence, arrangement B applies to the UK (Voogsgeerd 2006, p. 69). Arrangement B can be seen as strengthened self-regulation supported by non-statutory norms: codes take the form of a stock exchange recommendation or become part of the listing agreement or are a condition thereto. For reporting periods ending after 30 June 1993 the London Stock Exchange already required listed companies to include a corporate governance statement in their annual reports and accounts, thus applying the comply or explain principle (Weil, Gotshal & Manges 2002, p. 226) (Klijnsmit 2001, p. 383). In 1998 the Combined Code was also embedded in the listing rules on a comply or explain basis (London Stock Exchange Rules §12.43A(b)) (Weil, Gotshal & Manges 2002, p. 226). With respect to the UK 2010 Code, the FSA Disclosure and Transparency Rules sub-chapter 7.2 (for issuers whose securities are admitted to trading on a regulated market) and FSA Listing Rules 9.8.6 R and 9.8.7A R (for issuers of Premium listed equity shares, also being foreign companies listed in the UK with a Premium Listing) are of importance. To implement Directive 2006/46/ EC a consultation round was conducted and the rules of the directive were implemented by way of modifying the FSA listing rules adopting a minimum implementation (FSA Consultation Implementation 8th Company Law Directive 2007) (FSA Implementation 8th Company Law Directive 2008). Based on Part 6 of the Financial Services and Markets Act 2000 and section 1269 of the Companies Act 2006 the FSA itself was allowed to draft and modify the rules on corporate governance disclosures to implement the directive (FSA Consultation Implementation 8th Company Law Directive 2007). The implementation of Directive 2006/46/EC came into effect on 29 June 2008 for financial reporting periods beginning on or after that date by adding chapter 7 to the Disclosure and Transparency Rules and by slightly modifying the FSA Listing Rules (FSA Implementation 8th Company Law Directive 2008).

Taking the history of self-regulation in the UK into account, modification of the FSA Listing Rules to implement the directive is a logical step to take. However, most countries implement the Directive in legislation; meaning a legal embedding of the code and the comply or explain principle in hard legislation. Based on article 5 of the directive Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this directive by 5 September 2008 at the latest. Hence, implementation in listing rules is perhaps less usual, but nevertheless allowed.