Comply Or ExplainEdit
Comply Or Explain is a framework used in corporate governance that blends voluntary standards with market accountability. Under this approach, companies are expected to adhere to a code of governance, but if they choose not to comply with a given provision, they must publish a clear explanation of their alternative approach. The idea is to avoid rigid, one-size-fits-all rules while preserving transparency and investor confidence. Proponents argue that this structure better aligns governance with the realities of different business models, ownership structures, and market environments, while still delivering meaningful standards and accountability.
Historically, the concept gained prominence in jurisdictions with mature capital markets where investors seek both clarity and flexibility. It has become a common feature in national codes and stock-market guidelines, and it often coexists with formal requirements for disclosure and annual reporting. In practice, many firms that do comply with the code still publish detailed explanations when any deviation occurs, creating a living record of governance choices that investors can assess alongside performance. For readers and analysts, the difference between a clean compliance score and a thoughtful explanation can itself signal the quality of governance and the willingness of a board to tailor its approach to long-term value creation. See for example developments in the UK Corporate Governance Code and comparable standards like the Dutch Corporate Governance Code.
Concept and Mechanism
What the framework is and how it works
Comply Or Explain rests on a simple premise: there is value in setting high governance expectations, but firms should have the freedom to diverge when justified. A governance code typically lists principles and best practices. If a company follows those provisions, it reports that it complies. If not, it provides a detailed explanation, often including the rationale, the plan to address the gap, and a timeline. This mechanism relies on disclosure and the discipline of investors, auditors, and other stakeholders to assess whether the deviation is material and whether the alternative approach serves the company’s strategy and risk profile.
The content of explanations
Explanations are not excuses; they should be specific, evidence-based, and linked to concrete governance outcomes. Investors look for clarity on how minority rights are protected, how the board's composition supports strategy, how risk controls are maintained, and how performance is measured. In practice, explanations may reference factors like ownership structure, company size, or strategic priorities that make a particular rule less appropriate. See discussions around board independence, risk oversight, and remuneration governance as they appear in codes such as the UK Corporate Governance Code and related instruments like the ASX Corporate Governance Principles and Recommendations.
Oversight and accountability
The framework depends on market discipline and credible disclosure. Regulators may require annual reports to include a section describing each area of non-compliance and the justification for deviations. Institutional investors and proxy advisory firms often scrutinize explanations as part of their voting recommendations. When explanations are vague or repeated without improvement, markets tend to penalize the company through higher capital costs, weaker investor trust, or more intense activist engagement.
Variations across markets
While the core idea is shared, implementations differ. Some systems emphasize time-bound improvement plans; others rely on a reputational signal that accompanies explanations for governance choices. In practice, jurisdictions have blended compulsory disclosure with flexible standards to balance accountability with corporate autonomy. Examples and related concepts can be explored in UK Corporate Governance Code, Dutch Corporate Governance Code, and other national codes that feature a comply-or-explain structure.
Geographic Adoption and Variations
Europe and common-law contexts
In Europe, many markets use a comply-or-explain approach as a central element of corporate governance codes. The UK, in particular, has popularized the model through the UK Corporate Governance Code, while the Dutch Code and other European instruments implement the same logic with country-specific adaptations. The approach also informs cross-border listings where companies must reconcile varying expectations about governance best practices.
Other leading markets
Beyond Europe, markets like Australia incorporate comply-or-explain features into their governance framework, often under the umbrella of the ASX Corporate Governance Principles and Recommendations. In these environments, the code serves as a benchmark for investors while preserving space for firms to tailor governance arrangements to their ownership and strategy. The model’s flexibility is seen as especially valuable for parent-subsidiary structures, family-owned businesses, and firms with complex stakeholder ecosystems.
Benefits and Rationale from a Market-Oriented Perspective
- Flexibility for diverse business models: Companies can align governance with strategy and ownership without being constrained by a rigid ruleset.
- Reduced regulatory burden: A compliant framework lowers the compliance costs associated with blanket rules while preserving transparency and accountability.
- Market discipline and investor signaling: Clear explanations enable investors to judge whether deviations are justified and whether governance aligns with long-term value creation.
- Encouragement of ownership engagement: Explanations often invite ongoing dialogue with investors, boards, and auditors, strengthening accountability without prescriptive mandates.
- Competitiveness and entrepreneurship: By avoiding one-size-fits-all rules, firms can innovate in governance practices in ways that fit their unique circumstances, potentially supporting long-run performance.
Controversies and Debates
Critiques from proponents of stricter regulation
Critics who favor more uniform, rules-based governance argue that compliant codes with explanations can become a loophole for weak oversight. They worry that vague or cosmetic explanations may obscure material governance failings and disadvantage smaller or less sophisticated investors who lack the resources to scrutinize disclosures thoroughly.
Counterarguments from market-oriented observers
From a market-driven standpoint, the key value is not a tick-box checklist but the quality and credibility of explanations. When markets prize transparency and boards demonstrate thoughtful, data-backed reasoning, explanations can serve as a superior signal to long-term investors. The approach is seen as aligning governance with real-world complexity rather than imposing rigid standards that stifle entrepreneurship or misallocate management effort.
Debates about minority investor protection
Opponents argue that explain-and-deviate frameworks might weaken protection for minority holders if deviation goes unaddressed. Supporters counter that explanations force boards to articulate how governance remains effective despite deviations and that credible explanations paired with active ownership scrutiny can actually enhance protections, since major investors can discipline managers through votes, engagement, and capital-allocation signals. See discussions in relation to governance principles such as board independence and risk oversight within the context of board independence and shareholder rights.
Why some critics describe the objections as misguided
A common charge from critics who push for heavier-handed rules is that the comply-or-explain model substitutes good intent for good outcome. Proponents respond that outcomes are better achieved when managers are free to tailor governance to strategy, while still being held to clear explanations and comparable standards. They argue that heavy-handed, prescriptive regulation often distorts decision-making and imposes costs that don’t translate into better long-run performance. In this view, the model aligns with markets’ preference for accountability and flexibility over bureaucratic conformity.