7.2.2 Summary Part II Comply or explain principle in practice

Part II of the underlying research involves a study of the comply or explain principle in practice. Chapter 4 reviews the theoretical aspects of the corporate governance systems and the lay-out of the comply or explain principles of the five countries by means of a comparative legal analysis. Thereafter, in chapter 5, the comply or explain principle in practice is studied empirically by means of a content analysis of corporate governance statements. Chapter 6 completes Research Part II as a synopsis of the legal and empirical research on the comply or explain principle in practice and provides recommendations for achieving a common understanding of the comply or explain principle's scope and most effective form.

Chapter 4 researches what the lay-out of the comply or explain principle is, as embedded in the corporate governance system of the five countries under research, and whether there is currently a common understanding of the principle's scope and its most effective form. This comparative legal analysis is performed by answering eight key questions per country under research (Belgium, Italy, Germany, the Netherlands and the UK). As a consequence, it is not the intention to give a full overview of the national corporate governance systems, or to analyse and subsequently compare the contents of the national corporate governance codes. The focus of this study is on the comply or explain principle and its embedding in the national corporate governance systems under review. In this respect, the countries are tested against an optimum framework for the comply or explain principle as it should exist in practice. In general, corporate governance codes and thus the comply or explain principle were roughly developed for two reasons by EU countries: a genuine desire to improve the corporate governance structure of their companies or to use the code as a marketing instrument to enhance their competitive position and show their investors that their corporate governance is in line with international best practice. Over the years codes were redrafted, renewed or modified at least once, which in general resulted in more detail and an increase in size. Nevertheless, differences in size and detail can still be seen (a difference of 36 to 128 provisions per code) which is partly explainable by the country's uncertainty avoidance level (high for Belgium and Germany, low for the UK), the role company legislation has, or the fact that previous codes were not complied with sufficiently (the Netherlands). Although codes, as dynamic instruments, can be changed due to important developments, for all the countries under research the main topics remain the board's structure and functioning, and sometimes more specifically the non-executives or supervisory board members. Culture and thus the differences are reflected upon, perhaps not so much in the contents per se, but more in the code's and comply or explain principle's embedding and functioning in practice. The comply or explain principle and its embedding sometimes already were, or over time became part of the corporate culture, whether or not accelerated by the importance of listed companies in a country. Furthermore, the judicial corporate governance arrangements of the countries under research are elaborated upon further and the different ways discussed in which Directive 2006/46/EC is implemented. Matters such as the disclosure of the corporate governance statements and the accountability for and monitoring of code compliance are reviewed further. At the end of chapter 4 the optimum framework for the comply or explain principle to function within is specified further based on results from the comparative legal research. The five countries score almost the same number of points, but the scores on the seven topics (amongst which three-level supervision of code compliance, annual monitoring of code compliance and a clear lay-out of the corporate governance statement) within this framework vary substantively. Hence, in practice there is as yet no common understanding of the principle's most effective form and improvements are necessary in order to achieve the optimum framework for the comply or explain principle to function within.

The empirical research in chapter 5 reviews how the comply or explain principle is applied in practice within the five Member States in recent years and to what extent convergence is visible. After a description of the previous studies performed on code compliance, the hypotheses are formulated, and the data collection and research methodology elucidated further. The research is divided into univariate, bivariate and multivariate analyses based on a content analysis of the corporate governance statements of in total 237 companies for the years 2005-2007 of the five countries under research. It is i.a. researched whether the annual accounts contain a corporate governance statement discussing code compliance, in what manner deviations from code provisions are explained, what those code provisions involve, what the reason for non-compliance is and whether the explanation is considered sufficient.

The univariate results showed that 20.67 per cent of the companies under review that paid attention to code compliance declared that they complied fully with their national code. In total, 32 per cent of the corporate governance statements have the preferred lay-out: explanations presented list-wise with reference to the code provision not complied with. Year-wise the level of code compliance increases, as well as the quality of the explanations provided in the case of non-compliance. However, it also became apparent that this increase levels off and for some countries even changes into a slight decrease in the level of code compliance. The top 5 code provisions complied with least are a fixed set and a considerable percentage compared to all the deviations together. This top 5 is quite similar for each of the five countries under review and has hardly changed over the three years. These provisions mainly involve the establishment of nomination and remuneration key committees, the remuneration and shareholdings of directors, independence criteria of directors and appointment periods. As regards these provisions that are hard to comply with the data shows that it is also difficult to give a sufficient explanation. Although an increase in the quality of explanations can be seen, 40.2 per cent of the explanations found are still considered insufficient.

The bivariate analyses in chapter 5 tests five hypotheses concerning the level of compliance and successively time, judicial corporate governance arrangement, company's size, category-specific deviations and the reasons provided for deviations. The period of time the comply or explain principle has been applicable in a country does matter for the level of compliance. The longer the principle has been applicable, the higher the level of compliance. With respect to size, market capitalisation in general does not matter for the level of compliance. But when the quality of explanations is taken into account size does matter; larger companies do not necessarily have a higher compliance rate, but their deviations are explained more sufficiently. Furthermore, companies quoted on the country's main stock exchange index have a higher level of compliance than companies listed on the first and subsequently second to main stock exchange index. Moreover, their explanations suffice more. The comply or explain principle embedded in non-statutory norms results in the highest compliance rates compared to the other judicial corporate governance arrangements (pure self-regulation, the principle facilitated by statutory rules and metaregulation). It is furthermore analysed that the lower the level of compliance, the more general the explanations and the more deviations with respect to the management board and its remuneration, as likewise analysed in the univariate results.

In the multivariate analyses the relation between the dependent variable, the level of compliance, and the independent variables of time, corporate governance arrangement and size are tested by means of linear regression models. Taking all the variables into account simultaneously, the period of time the comply or explain principle has been applicable in a country predicts the level of compliance; the longer it has been applicable, the higher the level of compliance. With respect to the corporate governance arrangement in the model analysed, self-regulation scores best. But when the quality of the explanations is taken into account, the more strict corporate governance arrangement C (principle facilitated by statutory rules) predicts the highest level of compliance. The explanatory variables of the market capitalisation show almost no significance; hence size does not seem to matter. The defined dummies on the stock exchange indexes prove otherwise. For three of the four models tested it is predicted that, taking all the variables into account, the more important the index on which the company is listed (in practice the larger the company), the higher the predicted increase in the level of compliance.

The main results of the empirical research on the comply or explain principle in practice as shown in chapter 5 are that:

Chapter 6 is a synopsis of the research on the comply or explain principle in practice and provides recommendations regarding the necessary conditions that must be put in place for the comply or explain principle to work adequately. Whilst arguing from the standpoint of a variety of improved corporate governance systems based on national cross-references and believing in the 'one size does not fit all' and 'made to measure' approach, twelve recommendations are provided in chapter 6. Per (sub)section a problem related to code compliance is outlined, based on the research results of chapters 4 and 5. Thereafter possible solutions for the compliance issues are discussed and, if deemed necessary, rephrased into practical recommendations. The recommendations in themselves involve a check-list or to-do list for the parties concerned, i.e. the companies, the stakeholders, the EU Commission, governments and other regulators. Five recommendations concern the legal framework of the comply or explain principle and partly recommend changes to Directive 2006/ 46/EC. The other seven recommendations address the issue of how to improve the application of the comply or explain principle in practice. Section 7.3 below goes into more detail as regards these recommendations when outlining the recommended route.