European Forum clarifies 'comply or explain' principle

The European Corporate Governance Forum, which examines best practices in Member States in the field of corporate governance, has issued a public statement clarifying the 'comply or explain' principle, which obliges companies to justify any deviation from corporate governance codes.

Internal Market and Services Commissioner Charlie McCreevy said: "The principle of 'comply or explain' is a central element of EU corporate governance. So it is important to have a common understanding of the principle's scope and of the conditions that need to be put in place for it to work effectively. I welcome the Forum's findings, which will help everyone to approach these questions in the right way."

The 'Comply or explain' principle

The 'comply or explain' principle forms the basis of the European code-based approach to corporate governance. It provides for more flexible and effective market-led regulation. However, there is agreement that 'comply or explain' can work only if its surrounding regulatory framework ensures that companies respect the obligation to give reasons for deviations from the applicable corporate governance codes.

The Forum has therefore undertaken to define in more detail the advantages and the limits of the 'comply or explain' principle from a European perspective. As a first step it has now adopted a common statement on the basic principles that guide the system of 'comply or explain'.

The Forum's statement on the 'comply or explain' principle is available from the ECGF site.