The Principle of 'Comply or Explain' Underpinning the UK Corporate Governance Regulation: Is There a Need for a Change?

Corporate Law: Corporate Governance Law Journal, Vol 7, Issue 81, November 27, 2015

33 Pages Posted: 15 Nov 2015 Last revised: 30 Apr 2018

See all articles by George Hadjikyprianou

George Hadjikyprianou

University College London; G.C.Hadjikyprianou & Associates LLC; Leicester Law School

Date Written: May 20, 2015

Abstract

The UK Corporate Governance Code, previously known as the Combined Code, has been widely regarded as one of the most influential corporate governance codes around the globe. Its main characteristic and what distinguishes it from the Sarbanes-Oxley Act in the United States, is the flexibility it offers to the companies. The voluntariness and flexibility of the Code is expressed through the “comply-or-explain” principle, a principle that has been supported not only in the UK but also at a European Union level and beyond. However, despite the undeniable advantages that the flexible principle of comply-or-explain offers, it has been the subject of severe criticisms during the last decades which call for reforms in this area of law. In particular, there are those who argue that the principle of 'comply or explain' has failed to achieve its objectives and that, in practice, it has not brought any meaningful improvement in the quality of corporate governance in the UK.

This paper argues that, although comply-or-explain suffers from several practical deficiencies, it must not be completely abolished. In particular, it suggests that, instead of adopting hard laws in place of the flexible soft laws, a regulatory intervention is needed to ‘fix’ the principle’s deficiencies making comply-or-explain regime more effective and efficient and thus avoiding any destabilization of the foundations of the corporate governance in the UK. Hence, this paper concludes by proposing a way in which such a regulatory intervention can increase the overall quality of the comply-or-explain regime while at the same time preserving its advantages.

Keywords: Corporate, Corporate Governance, Comply or Explain, Reform, UK, Sarbanes-Oxley Act, Code, Corporate Governance Code, Soft law, Companies, Shareholders, Voluntary Code, one size fits all, Quality, Directors, Efficiency, Regulatory Intervention, comply or explain principle, voluntariness

JEL Classification: G3, G34, K2, K20, K22

Suggested Citation

Hadjikyprianou, George and Hadjikyprianou, George, The Principle of 'Comply or Explain' Underpinning the UK Corporate Governance Regulation: Is There a Need for a Change? (May 20, 2015). Corporate Law: Corporate Governance Law Journal, Vol 7, Issue 81, November 27, 2015, Available at SSRN: https://ssrn.com/abstract=2690687 or http://dx.doi.org/10.2139/ssrn.2690687

George Hadjikyprianou (Contact Author)

University College London ( email )

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G.C.Hadjikyprianou & Associates LLC ( email )

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Leicester Law School ( email )

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