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Comply or explain

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Comply or explain is a regulatory approach used in the United Kingdom, Germany, the Netherlands and other countries [1] in the field of corporate governance and financial supervision. Rather than setting out binding laws, government regulators (in the UK, the Financial Reporting Council (FRC), in Germany, under the Aktiengesetz) set out a code, which listed companies may either comply with, or if they do not comply, explain publicly why they do not.

The purpose of "comply or explain" is to "let the market decide" whether a set of standards is appropriate for individual companies. Since a company may deviate from the standard, this approach rejects the view that "one size fits all", but because of the requirement of disclosure of explanations to market investors, anticipates that if investors do not accept a company's explanations, then they will sell their shares, hence creating a "market sanction", rather than a legal one. The concept was first introduced after the recommendations of the Cadbury Report of 1992.


The UK Corporate Governance Code, the German Corporate Governance Code (or Deutscher Corporate Governance Kodex) and the Dutch Corporate Governance Code 'Code Tabaksblat' (nl:code-Tabaksblat) use this approach in setting minimum standards for companies in their audit committees, remuneration committees and recommendations for how good companies should divide authority on their boards. Swedish company law requirements expect companies to identify any code rules which they have not complied with, explain why they have not complied, and describe their alternative solution.[2]

Under the revised Shareholder Rights Directive of 2017 (SRD II), companies must develop and publish a policy stating how voting rights operate and how shareholders are engaged in the running of the company, subject to the "comply or explain" principle.[3]

Benefits and drawbacks of the Comply or Explain approach[edit]

The approach has both benefits and drawbacks.


The main benefits are that the approach offers flexibility to corporations, lowers their compliance burden, and stimulates discussion and for grounds in changes in legislation. (Ho 2017;[4] Galle 2014;[5] Abma and Olaerts 2012;[6] Lu 2021[7])


The main drawbacks are that material compliance is difficult to enforce, an overemphasis on ‘tick-the-box’ compliance and, most prominently, that corporations give perfunctory explanations for non-compliance. (Ho 2012;[4] Galle 2014;[5] Abma and Olaerts 2012[6]) The lack of meaningful explanations is seen as the biggest drawback.

Many studies point to the low quality of explanations given in comply or explain mechanisms in corporate governance and non-financial reporting regulations (MacNeil and Li 2006;[8] Cuomo et al 2016;[9] FRC 2021[10]). In the UK (MacNeil and Li 2006;[8] Shrives and Brennan 2015[11]), Germany (Talaulicar and Werder 2008[12]), Greece (Nerantzidis 2015[1]), Italy (Lepore et al. 2018[13]) and the Netherlands (Hooghiemstra 2012;[14] Monitoring Commissie Corporate Governance Code 2020[15]) studies find that explanations for non-compliance with corporate governance codes are often inadequate. Similar results are found when studying non-compliance explanations in the realm of European non-financial reporting (Björklund 2021;[16] Monciardini et al. 2020;[17] Szabó and Sørensen 2015;[18] Boiral 2013[19]). This collection of research indicates that possible high levels of ‘compliance’ with corporate governance codes and non-financial reporting requirements are in fact much lower due to the large percentage of inadequate explanations.  

Enforcement and supervision[edit]

Due to the drawbacks to the comply or explain approach, several studies have proposed that an increased level of (public) enforcement and supervision is necessary in order to monitor inadequate explanations of non-compliance. (Lu 2021;[7] Hooghiemstra 2012;[14] Keay 2014;[20] Seidl et al. 2013;[21] Boiral 2013[19]). Since the explanation for non-compliance is the cornerstone of the comply or explain approach, authors are specifically calling on public enforcement authorities to take a more active role. (Lu 2021;[7] Hooghiemstra 2012;[14]) Some researchers have found that there are certain qualities of corporations that are associated with higher and lower levels of high-quality non-compliance explanations (2.4). Studies conducted in Germany, Italy and the Netherlands give insights into which qualities often indicate high-quality non-compliance explanations (Talaulicar and Werder 2008[12]); Hooghiemstra 2012;[14] Lepore et al. 2018[13]). These insights could be useful to stakeholders wanting to monitor compliance and to public enforcement authorities if they are tasked with more stringent supervision.

The FRC has published guidance on "what constitutes an explanation" as a means of comparing the approach of those who prepare businesses' explanations with the expectations of those to whom they are addressed.[22]


  1. ^ a b Nerantzidis, Michail (5 May 2015). "Measuring the quality of the "comply or explain" approach". Managerial Auditing Journal. 30 (4/5): 373–412. doi:10.1108/maj-08-2014-1060. ISSN 0268-6902.
  2. ^ Financial Reporting Council, What constitutes an explanation under 'comply or explain'?, Report of discussions between companies and investors, [sic], page 3, published February 2012, accessed 30 January 2023
  3. ^ WM Group, "Comply or explain" under SRD II, accessed 19 December 2022
  4. ^ a b Ho, Harper; E, Virginia (15 July 2017). "'Comply or Explain' and the Future of Nonfinancial Reporting". Rochester, NY. SSRN 2903006. {{cite journal}}: Cite journal requires |journal= (help)
  5. ^ a b Galle, JGCM (2012). "Consensus on the comply or explain principle within the EU corporate governance framework: legal and empirical research". Ondernemingsrecht.
  6. ^ a b Olaerts, Mieke; Abma, Rients (21 January 2012). "Is the Comply or Explain Principle a Suitable Mechanism for Corporate Governance throughout the EU?: The Dutch Experience". European Company Law. 9 (6): 286–299. doi:10.54648/eucl2012049. ISSN 1572-4999. S2CID 167663270.
  7. ^ a b c Lu, Wei (2021). "The Value of the "Comply or Explain" Principle". Advances in Social Science, Education and Humanities Research. Proceedings of the 2021 International Conference on Social Science:Public Administration, Law and International Relations (SSPALIR 2021). 580. Paris, France: Atlantis Press. doi:10.2991/assehr.k.210916.005. ISBN 978-94-6239-431-5. S2CID 244236902.
  8. ^ a b Macneil, Iain; Esser, Irene-Marié (1 February 2022). "The Emergence of 'Comply or Explain' as a Global Model for Corporate Governance Codes". European Business Law Review. 33 (1): 1–56. doi:10.54648/eulr2022001. ISSN 0959-6941. S2CID 248615366.
  9. ^ Cuomo, Francesca; Mallin, Christine; Zattoni, Alessandro (22 November 2015). "Corporate Governance Codes: A Review and Research Agenda". Corporate Governance: An International Review. 24 (3): 222–241. doi:10.1111/corg.12148. ISSN 0964-8410. S2CID 153462939.
  10. ^ "Financial Reporting Council (FRC) Review of Combined Code", Encyclopedia of Corporate Social Responsibility, Berlin, Heidelberg: Springer Berlin Heidelberg, 2013, p. 1144, doi:10.1007/978-3-642-28036-8_100724, ISBN 978-3-642-28035-1, retrieved 4 May 2022
  11. ^ Shrives, Philip J.; Brennan, Niamh M. (March 2015). "A typology for exploring the quality of explanations for non-compliance with UK corporate governance regulations". The British Accounting Review. 47 (1): 85–99. doi:10.1016/j.bar.2014.08.002. hdl:10197/7419. ISSN 0890-8389. S2CID 14274658.
  12. ^ a b Talaulicar, Till; v. Werder, Axel (July 2008). "Patterns of Compliance with the German Corporate Governance Code". Corporate Governance: An International Review. 16 (4): 255–273. doi:10.1111/j.1467-8683.2008.00696.x. ISSN 0964-8410. S2CID 154963015.
  13. ^ a b Lepore, Luigi; Pisano, Sabrina; Di Vaio, Assunta; Alvino, Federico (1 October 2018). "The myth of the "good governance code": an analysis of the relationship between ownership structure and the comply-or-explain disclosure". Corporate Governance: The International Journal of Business in Society. 18 (5): 809–838. doi:10.1108/cg-08-2017-0197. ISSN 1472-0701. S2CID 158939601.
  14. ^ a b c d Hooghiemstra, Reggy (March 2012). "What determines the informativeness of firms' explanations for deviations from the Dutch corporate governance code?". Accounting and Business Research. 42 (1): 1–27. doi:10.1080/00014788.2011.600630. ISSN 0001-4788. S2CID 154300245.
  15. ^ Rietveld, S. (May 2021). "Het Monitoring Rapport Corporate Governance Code over boekjaar 2019: tijd voor vernieuwing?". Maandblad voor Ondernemingsrecht. 7 (3–4): 129–138. doi:10.5553/mvo/245231352021007304007. ISSN 2452-3135. S2CID 236589700.
  16. ^ Stisser, Davina Theresa (2019), "D. Die Sicherungsverwahrung – de lege lata et de lege ferenda", Die Sicherungsverwahrung - de lege lata et de lege ferenda, Nomos Verlagsgesellschaft mbH & Co. KG, pp. 154–293, doi:10.5771/9783845297361-154, ISBN 9783845297361, S2CID 239116886, retrieved 4 May 2022
  17. ^ Monciardini, David; Mähönen, Jukka Tapio; Tsagas, Georgina (1 July 2020). "Rethinking Non-Financial Reporting: A Blueprint for Structural Regulatory Changes". Accounting, Economics, and Law: A Convivium. 10 (2). doi:10.1515/ael-2020-0092. hdl:10871/124131. ISSN 2194-6051. S2CID 225409616.
  18. ^ Szabó, Dániel Gergely; Sørensen, Karsten Engsig (1 January 2015). "New EU Directive on the Disclosure of Non-Financial Information (CSR)". European Company and Financial Law Review. 12 (3). doi:10.1515/ecfr-2015-0307. ISSN 1613-2556. S2CID 152563428.
  19. ^ a b Boiral, Olivier (16 September 2013). "Sustainability reports as simulacra? A counter-account of A and A+ GRI reports". Accounting, Auditing & Accountability Journal. 26 (7): 1036–1071. doi:10.1108/aaaj-04-2012-00998. hdl:20.500.11794/13615. ISSN 0951-3574.
  20. ^ Keay, Andrew (June 2014). "Comply or explain in corporate governance codes: in need of greater regulatory oversight?". Legal Studies. 34 (2): 279–304. doi:10.1111/lest.12014. ISSN 0261-3875. S2CID 143337208.
  21. ^ Seidl, David; Sanderson, Paul; Roberts, John (13 January 2012). "Applying the 'comply-or-explain' principle: discursive legitimacy tactics with regard to codes of corporate governance". Journal of Management & Governance. 17 (3): 791–826. doi:10.1007/s10997-011-9209-y. ISSN 1385-3457. S2CID 154851812.
  22. ^ PLC Corporate, Corporate governance: FRC report on what constitutes an explanation under comply or explain, ThomsonReuters Practical Law, published 15 February 2012, accessed 29 January 2023

See also[edit]