Question

A unique feature of the UK corporate governance regulation regime is the ‘comply or explain’ approach.

Explain what is meant by ‘comply or explain’, using examples to illustrate your answer. Discuss whether you think ‘comply or explain’ is beneficial or damaging to overall corporate governance compliance.

Answer 1

Comply or explain is a regulatory approach used in the United Kingdom in the field of corporate governance and financial supervision.Rather than setting out binding laws,government regulators set out a code,which listed companies may either comply with or if they do not comply,explain publically why they do not.The purpose of 'comply or explain' is to let the market decide whether a set of standards is appropriate for individual companies.Since a company may deviate from the standard,this approach rejects the view that 'one size fits all',but because of the requirement of disclosure of explanations to market investors,anticipates that if investors do not accept a company's explanations,then investors will sell their shares,hence creating market sanction rather than a legal one.

The flexibility it offers to companies,who can choose between complying with its priciples or explaining why they do not,stands in sharp contrast to mandatory syatem.Therefore the comply and explain model ultiamtely would lead to better governance.