Deconstruction and Reconstruction of the “Comply or Explain” Principle in EU Capital Markets

The “comply or explain” principle has already acquired significant importance in corporate law and regulations and is considered to be the preferred regulatory tool in the EU for increasing transparency and disclosure of market participants’ strategies and activities. The flexibility of the principle is perceived as the most suitable way to create indirect coordination of practices amongst market actors, as well as better mutual understanding of their different priorities. Having initially shown its considerable appeal in the area of corporate governance statements issued by corporate entities, it has now expanded its influence into other areas serving similar transparency imperatives, such as the exercise of stewardship responsibilities by institutional investors and proxy advisors. In this paper, we will focus on the merits and shortfalls of the “comply or explain” principle in all the above-mentioned areas, both at national and at EU levels, and will critically challenge its effectiveness in the current regulatory framework. Moreover, we will seek to justify its continued use by demonstrating its future potential role as a veritable dialogue spectrum between different market participants. Lastly, we will emphasise the need for a soft monitoring process from national regulators which will enable both the “comply or explain” principle and its users to participate in a holistic effort for the adoption of sound investment strategies via the fruitful exchange of views and ideas and better communication with regard to their respective role in capital markets.