Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Friday, March 10, 2006

Principles v. Guidelines: The EU's Statement on the "Comply or Explain" Approach to Governance

In Pirates of the Caribbean: The Curse of the Black Pearl, the pirate captain Barbossa told Elizabeth, "First, your return to shore was not part of our negotiations nor our agreement, so I must do nothin'. And secondly, you must be a pirate for the pirate's code to apply, and you're not. And thirdly, the code is more what you'd call 'guidelines' than actual rules." Barbossa's approach to the pirate code is similar to the "comply or explain why you don't comply" approach to corporate governance in the EU and elsewhere.

The EU's Corporate Governance Forum issued a statement on the "comply or explain" approach to corporate governance this week. The group strongly endorsed the "comply or explain" approach, believing it to be a "better and more efficient approach than detailed regulation." The group noted, however, that this approach works only if the obligation to comply or explain why not is real, where companies must provide clear and transparent disclosure and where shareholders have tools they can use to hold companies accountable. Shareholders should review each company's corporate governance statement in deciding how to vote their shares.

Some companies may face competing corporate governance rules where they are incorporated in one country, but their shares are listed on the stock exchanges of other countries. The Forum opined that the preferred approach is for at least one country's code -- rather than none -- apply to the issuer.

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