Comply or Explain: Market Discipline and Non-Compliance with the Combined Code

14 Pages Posted: 21 May 2005

See all articles by Iain MacNeil

Iain MacNeil

University of Glasgow - School of Law

Xiao Li

University of Glasgow - School of Law

Date Written: May 2005

Abstract

The "comply or explain" principle adopted by the UK's Combined Code on Corporate Governance has now been in operation for twelve years. In this paper we examine the nature of the explanations that have been given by companies with an established record of non-compliance ("serial non-compliers") and consider the role of the market in permitting deviations from the Combined Code. In particular, we consider the significance of share price performance as a factor that is relevant in justifying non-compliance and the extent to which investors appear to rely on this indicator rather than engage in the more difficult task of judging the relative merits of the Code provisions against alternatives. Our approach differs from much of the research linking corporate governance with financial performance in that it is based on the premise that financial performance may be a determinant of corporate governance structure rather than vice versa. Our survey of FTSE 100 serial non-compliers suggests that there is in fact a strong link between share price performance and investors' tolerance of non-compliance with the Combined Code.

Keywords: Corporate governance, Combined Code, market discipline

JEL Classification: G34, K22, K42

Suggested Citation

MacNeil, Iain and Li, Xiao, Comply or Explain: Market Discipline and Non-Compliance with the Combined Code (May 2005). Available at SSRN: https://ssrn.com/abstract=726664 or http://dx.doi.org/10.2139/ssrn.726664

Iain MacNeil (Contact Author)

University of Glasgow - School of Law ( email )

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Xiao Li

University of Glasgow - School of Law ( email )

Stair Building
5 - 8 The Square
Glasgow, Scotland G12 8QQ
United Kingdom
+ 0141 330 5863 (Phone)
+ 0141 330 4900 (Fax)

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