Home > Corporate Governance Theory > What to do with the “Comply or Explain” principle? (II)

What to do with the “Comply or Explain” principle? (II)

In November 2015 I published a comment on an article by Hadjikyprianou, George C. (1) who considered the principle needed some practical reform, because both the quality of the explanations and its oversight by shareholders and supervisory bodies was defective. In order not to steal the shareholders ‘role and to reduce private monitoring costs he suggested that a public institution could create a rating system for the CG practice by public firms.

In 2014 the same concern had also led the EU to publish a recommendation on how to use the “comply or explain” principle, so apparently institutions started offering guidelines for better explanations instead of creating the rating system, (2).


The EU suggested that firms explain what CG guideline they did not abide by, how, why, the decision-making process they followed to decide not to comply (temporarily or not), and what action they were taking so as to follow best CG practices for their “size”.

In July 2016, and partly with the aim to give the EU guideline some additional public exposure, the Spanish SEC equivalent, CNVM, has published a Guide for best practices when applying the “comply or explain” principle, (3).

As a start, the CNMV acknowledges that firms seem to think of the explanations ex-post, and not when adopting the decision not to comply; also that boards usually adopt governance decisions without taking into account whether certain CG principles must be followed or not and why. As a consequence, the CNMV adds some extra recommendations:

1.- Firms should explain why a certain “recommendation” is not followed, what action has been taken instead, why it better helps reach the “principle”`s aim, (4) and why it enhances the firm`s sustainability. In so doing, firms should be concrete and refer to their particular characteristics as a firm.

2.- Firms need to explain the decision-making process followed.

The CNMV adds some examples of what can be considered a bad explanation, which basically owes the deficiency to its:

  • Redundancy,
  • Generality,
  • Alternative nature: when no explanation is given about the decision, but an alternative criteria on CG is explained or justified;
  • Temporary (only) reference: when the company explains that it will comply in the future, but not explaining why it does not today.

Finally, the CNMV tries to clarify the options when firms answer whether they comply or not: beyond the “comply” and “explain” options, “partial compliance” and “not applicable” can sometimes be accepted.

It is clearly a good move by the CNMV to insist in the EU`s recommendations and to add some particular guidelines and examples in the Spanish case. CG committees and boards in general should hear and improve their CG reports. My additional concern is about the shareholders´ oversight and the hypothesis that the market applies a valuation to different CG practices…perhaps the rating systems would still be better, more noisy and difficult to disregard by Institutional Investors, Asset Managers, retail investors, …

(1) https://joaquinbarquero.wordpress.com/2015/11/22/what-to-do-with-the-comply-or-explain-principle/

(2) http://www.boe.es/doue/2014/109/L00043-00047.pdf

(3) http://www.cnmv.es/DocPortal/Publicaciones/CodigoGov/GuiaCumplirExplicar.pdf

(4) The Spanish Code is structured in 25 Principles, or broad objectives in CG that firms should adopt, and several particular “Recommendations” for each principle, (64 in total).

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