Should Companies…

Should Companies “Comply or Explain” or “Comply and Explain” ?

At the core of corporate governance is the role of the board in overseeing how management serves the long-term interests of shareholders and other stakeholders. International perspectives diverge on the primary responsibilities of board directors, with an Anglo-Saxon model that emphasizes the protection of shareholders’ assets and return on investment, while in continental Europe many feel that the board’s responsibility is to protect the employees first, and shareholders second.

Klaus-Peter Müller argues that Germany’s voluntary code on corporate governance helps strengthen the business community, and increases the attractiveness of the country’s companies and capital markets to international investors. “Companies don’t have to obey, but they do have to explain. Comply or explain.” For Müller, the flexibility of the German Corporate Governance Code is not an expression of bad governance, but the key is to explain when there are deviations. This provides transparency to the capital markets so that they can draw their own conclusions.

For John Wilcox, CEO of Sodali, it is important for shareholders and companies to align their interests. He prefers a slightly different version to the German model. “Boards should have to comply AND explain. Boards need to give sufficient information to shareholders so they can make informed votes about the quality of directors.” Wilcox believes boards should have a legal duty to explain to shareholders how they are doing their job with an obligation to write a memorandum about how the company is run, how decisions are made and what the company’s values and culture are. This, he believes, will drive directors to think more about how they do their job.

With a fiduciary responsibility to protect the interests of the firm and its owners, Professor B. Espen Eckbo identifies some of the key challenges to board effectiveness. He questions whether a board that meets 8 times a year is sufficient to be effective, and highlights the difficulty for minority shareholders to have their voices heard.

Read more in the White Paper Corporate Governance and Leadership

Leave your questions and comments below…

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