2.1 Introduction

The central research question of this study is, as concluded from legal and empirical comparative research and whilst arguing for a 'one size does not fit all' approach and 'made to measure' code compliance: how can a common understanding of the comply or explain principle's scope and its most effective form be reached within the EU corporate governance framework? The underlying chapter contributes to the answer to this central research question by discussing the theoretical framework of the concept of corporate governance and the comply or explain principle. Therefore, the more precise research question in this chapter is: Which is the theoretical framework of corporate governance and the comply or explain principle as currently regulated and acknowledged within the EU?

To be able to make recommendations relevant to actual practice on how to reach a common understanding of the comply or explain principle and to reach the most effective form, the theoretical framework must first be determined. The underlying chapter clarifies corporate governance and the comply or explain principle by explaining the relevant theory. The drivers behind the EU corporate governance developments (as described in section 1.2.1) and hence subsequently the current EU corporate governance framework are elucidated by this theoretical framework. Based on economical and legal theory combined, a multidisciplinary overview is given on the theories that influence or even (partly) clarify the existence and developments of the two concepts. The existence of firms, the problems they face and the relevant remedies are reviewed to provide a comprehensive and above all a multidisciplinary theoretical framework - being the added value of chapter 2 - to build upon further in the remaining chapters concerning regulating corporate governance and the comply or explain principle (part I) and the comply or explain principle as applied in practice (part II) (see figure 2.1). The coherence between the theories discussed below not only influences the concepts of corporate governance and comply or explain themselves, 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 below.

Figure 2.1a shows the layout of chapter 2 and the interdependence between the items as discussed. It shows the theoretical framework of this study as further elaborated in the conclusion of this chapter. The scales show that the existence of firms (I) is influenced by corporate governance (IV) and the underlying theories (V). In its day-to-day business the firm encounters agency problems and costs (II) which, through specific remedies (III) - i.a. disclosure through the comply or explain principle - are minimised as much as possible.

To be able to determine the theoretical framework of the underlying study, the second section starts with a description of the development of the modern firm, its reasons of existence and the separation of ownership and control (I). Subsequently, the problems related to the separation of ownership and control, being the agency problems (II), and the possible solutions (III) are discussed, both from an economical and legal angle. Other relevant theories (among which the stewardship theory and stakeholder theory) are not neglected and also addressed directly, however for the sake of history and explanation the agency theory is explained first. Section three further elaborates upon this by clarifying and defining the concept of corporate governance (IV) through economical theory. Besides the four main theories influencing corporate governance (agency theory, stewardship theory, transactions cost economics and stakeholder theory), the theories on disclosure - a remedy to agency problems - are reviewed (legitimacy theory and market failure) (V) and interrelated with the comply or explain principle. In discussing these six main theories their changing roles and influences over time as well as their direct influence on code contents are further acknowledged whilst pointing forward to the comparative legal research in chapter 4. Section 5 concludes and summarises the contents of the previous sections to provide, in short, the theoretical framework necessary for viewing the remainder of this study in its proper context.