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"Comply or Explain": market discipline and non-compliance with the Combined Code

Author

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  • Iain MacNeil
  • Xiao Li

    (University of Glasgow)

Abstract

The "comply or explain" principle adopted by the UK's Combined Code on Corporate Governance has now been in operation for 12 years. In this paper we focus on two aspects of this regime. The first is the nature of the explanations that have been given by companies with an established record of non-compliance ("serial non-compliers") and the role of the market in permitting deviations from the Combined Code. In particular, we consider the significance of share price performance as a factor that is relevant in justifying non-compliance and the extent to which investors appear to rely on this indicator rather than engage in the more difficult task of judging the relative merits of the Code provisions against alternatives. Our approach differs from much of the research linking corporate governance with financial performance in that it focuses on the potential influence of financial performance (as measured by share price) on governance structure rather than vice versa. Our study of FTSE 100 serial non-compliers suggests that there is a "prima facie "link between share price performance and investors' tolerance of non-compliance with the Combined Code. The second issue we examine is the link between the principle of "comply and explain" and the self-regulatory status of the Code. We conclude that the benefits of flexibility generally associated with the self-regulatory status of the Code are overstated and that the Code could be integrated into mainstream company law. Copyright (c) 2006 The Authors; Journal compilation (c) 2006 Blackwell Publishing Ltd.

Suggested Citation

  • Iain MacNeil & Xiao Li, 2006. ""Comply or Explain": market discipline and non-compliance with the Combined Code," Corporate Governance: An International Review, Wiley Blackwell, vol. 14(5), pages 486-496, September.
  • Handle: RePEc:bla:corgov:v:14:y:2006:i:5:p:486-496
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    Citations

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    Cited by:

    1. Sergakis Konstantinos, 2015. "Deconstruction and Reconstruction of the “Comply or Explain” Principle in EU Capital Markets," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 5(3), pages 233-288, November.
    2. Miroslav Nedelchev, 2013. "Good Practices in Corporate Governance: One-Size-Fits-All vs. Comply-or-Explain," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 4(6), pages 75-81, November.
    3. Jean-Christophe Duhamel & Réda Sefsaf, 2017. "Valeur de la gouvernance d'entreprise et gouvernance des valeurs de l'entreprise. Recherche sur les effets des codes de gouvernance et les stratégies de communication en matière de gouvernance," Working Papers halshs-01633982, HAL.
    4. Brian G. M. Main & Calvin Jackson & John Pymm & Vicky Wright, 2008. "The Remuneration Committee and Strategic Human Resource Management," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(3), pages 225-238, May.
    5. Björn Fasterling, 2012. "Development of Norms Through Compliance Disclosure," Journal of Business Ethics, Springer, vol. 106(1), pages 73-87, March.
    6. Schmidt, Marko & Grigoleit, Jens & Nippa, Michael, 2009. "Die Auswirkungen der Unternehmenstransparenz auf den Erfolg börsenorientierter Kapitalgesellschaften in Deutschland - Eine Darstellung des aktuellen Forschungsstandes," Freiberg Working Papers 2009,01, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    7. Talaulicar Till, 2011. "Normierungseffekte der Co-Regulierung von Standards guter Corporate Governance / Normative effects of co-regulatory regimes of corporate governance," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 62(1), pages 269-296, January.
    8. Mallin, Chris & Melis, Andrea & Gaia, Silvia, 2015. "The remuneration of independent directors in the UK and Italy: An empirical analysis based on agency theory," International Business Review, Elsevier, vol. 24(2), pages 175-186.
    9. Black, Bernard & Kim, Woochan, 2012. "The effect of board structure on firm value: A multiple identification strategies approach using Korean data," Journal of Financial Economics, Elsevier, vol. 104(1), pages 203-226.
    10. Haar, Brigitte, 2016. "Shareholder wealth vs. stakeholder interests? Evidence from code compliance under the German corporate governance code," SAFE Working Paper Series 154, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    11. Korczak, Piotr & Liu, Xicheng, 2014. "Managerial shareholding policies and retention of vested equity incentives," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 116-129.
    12. Pursey P. M. A. R. Heugens & J. A. (Jordan) Otten, 2007. "Beyond the Dichotomous Worlds Hypothesis: towards a plurality of corporate governance logics," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1288-1300, November.
    13. repec:ibn:ibrjnl:v:11:y:2018:i:3:p:88-109 is not listed on IDEAS
    14. Emilia Tomczyk & Maria Aluchna, 2015. "Shareholder structure and compliance with the board best practice: econometric analysis," Applied Econometrics Papers, Department of Applied Econometrics, Warsaw School of Economics, vol. 2(1), pages 51-75.
    15. Mitsuru Mizuno & Isaac T. Tabner, 2009. "Corporate Governance In Japan And The Uk: Codes, Theory And Practice," Pacific Economic Review, Wiley Blackwell, vol. 14(5), pages 622-638, December.

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