The EU Approach to Corporate Governance has been Insufficiently Ambitious. Discussion.
Introduction
The EU Commission constantly makes attempts to address corporate governance issues. To a large extent, these attempts have been triggered by the Enron scandal in the United States. Although the scandal was not directly relevant to the EU, it was felt that European corporate governance framework should be reformed so as to prevent the kind of the scandal which erupted in the United States. The Green Paper issued in 2011 explains why the Union institutions pay significant attention to matters of corporate governance. Specifically, the Commission views corporate governance as one of the ‘key elements in building people’s trust in the single market’. The Commission further believes that good corporate governance contributes to the competitiveness of the European business. The Green Paper addresses a number of corporate governance issues, one of which is the ‘comply or explain’ principle. The principle consists in that the company which chooses to deviate from the recommendations of the relevant corporate governance code must explain the reasons behind the deviation. The EU Commission, however, observes that the explanations for the departures given by the companies are often insufficient. According to the Commission, the companies tend to simply state the departures without giving the reasons for them. Even if the explanations are offered, they are often very general. The current paper argues that in its attempt to tackle ‘comply or explain’ principle, the Commission oscillates between the soft law and hard law approaches. Therefore, its approach to such a corporate governance issue as ‘comply or explain principle’ is insufficiently ambitious.
The ‘Comply or Explain’ Principle
The ‘comply or explain’ principle was introduced by the Cadbury report on corporate governance. The report recommended that publicly listed companies should issue a statement of compliance which would reveal whether they have complied with the Corporate Governance Code, and if they have not, the statement would indicate the reasons for non-compliance. While proposing this principle the Cadbury Committee wished to adopt the principle adhered to in spirit rather than introducing a minimum compliance requirement. In other words, the Committee sought to make compliance voluntary with the reservation that non-compliance should be explained. The ‘comply or explain’ principle suggests that there is no compulsion, only voluntariness.
The principle was then embedded in the UK Corporate Governance Code. A corporate governance code is a set of best practice recommendations regarding various matters in corporate governance: structure of the board of directors, the relations between board and other stakeholders, behavior of the directors and so on. As a rule, corporate governance codes are not legally binding. They merely complement the binding legal system. The UK Corporate Governance Code is drafted in the same spirit. The Code itself provides that it is only guidance to the key elements of effective board practice. At the same time, the Code stipulates that is applicable to all companies with premium listing of equity shares independently of whether these companies are incorporated in the UK. It appears that while the Code …
