2.5 Summary and conclusions

Throughout chapter 2 a comprehensive and above all multidisciplinary theoretical framework of the underlying study is provided, which can be built on in further chapters and constitutes the added value of this chapter. The development up till now of corporate governance and the comply or explain principle is explained by means of the relevant theory and thus contributes to answering the central research question: 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 theoretical framework of this study is shown by the scales in figure 2.1a.

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. The contents of the chapter are summarised below and some conclusions are given with as starting point the rise of the modern firm.

Various reasons exist for establishing a firm, such as more certainty regarding the long-term and short-term contracts entered into, lower contract costs and synergy created by team production. Because of these reasons and for reasons of competition the Dutch Verenigde Oost-Indische Compagnie (VOC) was established in 1602. This earliest limited liability company faced the same problems due to the separation of ownership and capital as current companies do. Separation of ownership and control is efficient and in time became inevitable, although various difficulties between the owners (investors) and controllers (management) arose such as information asymmetry and agency problems. The remedies to solve or at least to decrease agency problems are explained in sections 2.2.5 and 2.2.7 (alignment, disclosure, commitment, separation of functions and monitoring/supervision/control). These remedies can be translated into legal strategies such as agent constraints, decision rights and agent incentives. The execution of the strategies is laid down in (international) corporate legislation for the purpose of solving and preventing agency problems; hence a convergence of law and economics. The comply or explain principle can be regarded as a variation of the disclosure remedy. In avoiding information asymmetry, transparency towards the stakeholders as regards code compliance is aimed for. From the perspective of the company (more specifically the board members) there is also the commitment remedy. The company is subject to the rules of the code, i.e. self-regulation and is committed to disclose the related information in its corporate governance statement. In this discussion the national corporate governance codes and thus the comply or explain principle can be regarded as a regulatory strategy to constrain the agents ex post through standards. Standards leave the precise determination of compliance with these standards to after the facts (ex post). The company (more specifically the board members) drafts the corporate governance statement after the financial year in which the code compliance did or did not take place.1

As a result of i.a. the corporate scandals, the belief in legislating and regulating the above remedies increased and the concept of corporate governance gained considerable attention. Corporate governance is influenced by various economical theories such as the agency theory, the transaction costs economics, the stewardship and stakeholder theory. These four theories are described briefly in section 2.3.1. Each theory throws some light on certain aspects of corporate governance and can clarify corporate governance related problems. The over time advanced understanding of the contents and relevance of the theories is taken into account in this respect. Their popularity has varied over time and their importance to the development of corporate governance has been criticised as well. The 'classical' agency theory loses battleground and the shareholder theory seems to seep into the European corporate governance structure. In short, it can be stated about these four theories, in relation to corporate governance, that a corporate governance system (and code) should take all agency relations and problems into account whilst acknowledging and rewarding possible collectivism and trustworthiness of its stewards, not neglecting the fact that an adequate corporate governance system also functions as a mechanism against incomplete contracts (transaction costs) between agents and principals (shareholders and stakeholders).

Corporate governance issues have existed at least since the VOC but have evolved over the years, affected by events such as the corporate scandals. In Europe, countries drafted national corporate governance codes based upon self-regulation of which the comply or explain principle was a part. International corporate governance initiatives were taken as well and although a European corporate governance code is unlikely, the OECD Principles and Directive 2006/46/EC have resulted in some sort of convergence in Europe. Although defining the concept of corporate governance is difficult, certain standard features can be mentioned (see section 2.3.2):

The drivers behind the EU corporate governance developments (as described in section 1.2.1), and hence subsequently the current EU corporate governance framework which is still evolving, are due to the theoretical framework described here. The variable coherence between the theories underlying the concept of corporate governance not only influences the concept of corporate governance itself but simultaneously the contents of national corporate governance codes and their application in practice. The sources of influence for the draughtsmen of the national corporate governance codes have evolved over time, synchronically with the concept of corporate governance itself.

The comply or explain principle (being a variation on the disclosure remedy) can best be clarified by the legitimacy theory and the theory regarding market failure. A company has to keep legitimating its existence to stakeholders and society and tries to achieve this by mandatory or voluntary disclosures, of which the comply or explain principle is a good example. By legitimising their corporate governance to the stakeholders companies try to prevent market failure (agency costs) and gain trust and investments. The comply or explain principle, as an instrument of corporate governance, tries to make a contribution to the minimising of agency cost/problems and enhance good corporate governance.

The main conclusions of this chapter are therefore as follows: