Comply or Explain: Market Discipline and Non-Compliance with the Combined Code
14 Pages Posted: 21 May 2005
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: Suggested Citation