Comply or explain … better: European Commission’s recommendation to enhance the quality of reporting under Corporate Governan…

In its recommendation of 9 April 2014, the European Commission wants companies listed on a regulated market to explain better about how they comply with, or derogate from, the corporate governance code.


Corporate governance (CG) codes applicable to listed companies are now common; however, to what extent companies should and do comply with the codes is another question. Clearly, CG codes tend to bind companies more and more, and not only through peer- or market pressure. The Belgian legislature has taken up (not to say copy-paste) principles and rules originating in the CG code of 2009 and made the audit and remuneration committees mandatory. Listed companies are also obliged to state in the management report that they comply with the CG code , in effect giving an official legal status to the code itself, albeit through a (compulsory) unilateral undertaking of the company.

The recent recommendation of the EU Commission is conceived as a way of implementing its December 2012 action plan on European company law and corporate governance. One major point of the action plan was to enhance transparency, among other things, by “improving corporate governance reporting”. The Commission notes that information and transparency are necessary for investors’ confidence and for the reputation and the legitimacy of the company, while expressing disappointment at some of the available explanations on derogations which are characterized as too general, as “box-ticking statements with little informative value”, or as too long and therefore difficult to grasp. The recommendation is addressed to not only the Member States but also the national CG committees and all listed companies.

The recommendation is made public together with a proposal to revise the Shareholder Rights Directive . This Directive was designed to facilitate the shareholders’ exercise of their own rights, especially their right to participate in general meetings. The proposal to revise includes as a key measure the general meeting’s binding vote on the remuneration of directors and clarifies the role of intermediaries, institutional investors, asset managers, and proxy advisors acting as or for shareholders of listed companies.

Drafting of the CG Code

The EU Commission wants CG codes to separate the mandatory provisions clearly from those that are subject to the “comply or explain” rule and also from those which apply on a voluntary basis. Belgium already does this, with the CG code separating its principles, provisions, and guidelines from each other.

Complying with the CG code has therefore three different meanings:

  • principles must be obeyed as such, but they are broad and obvious;
  • provisions are subject to the famous “comply or explain” rule;
  • guidelines should simply be considered.

Applying the “comply or explain” rule means that companies may depart from the provisions of the CG code on the condition that they explain in their CG statement which part of the code they do not apply and the reasons for doing so.

Quality of CG declarations

Perhaps surprisingly, the Commission recommends that information be explained better even if the company complies with provisions of the CG. Shifting to a kind of “comply and explain” rule in the interest of shareholders and investors, the Commission advises companies to “describe how they have applied the relevant corporate governance code recommendations to the topics of most importance for shareholders” (§4). The information should be “sufficiently clear, accurate, and comprehensive”, refer to the specific situation of the company (§5), and be available on the company’s website (§6).

Reporting on derogations

The main point of the recommendation, however, concerns the quality of the explanations given when provisions of the code are derogated from.

Again, the information should be specific to the company (i.e., they refer to the company’s “relevant features” such as size, structure, and ownership) and be sufficiently clear and detailed to enable shareholders to understand the consequences of the derogation (§9). The company should avoid the usage of any standard statements.

For each derogation, companies should:

“(a) explain in what manner the company has departed from a recommendation;
(b) describe the reasons for the departure;
(c) describe how the decision to depart from the recommendation was taken within the company;
(d) where the departure is limited in time, explain when the company envisages complying with a particular recommendation;
(e) where applicable, describe the measure taken instead of compliance and explain how that measure achieves the underlying objective of the specific recommendation or of the code as a whole, or clarify how it contributes to good corporate governance of the company.” (§8)

Unsurprisingly, this will make CG statements somewhat longer, which in turn necessitates a clear structural organization of the CG statement, and at least requires the company to give an explanation about the method it applies to communicate the required information (§10).

The Belgian Corporate Governance Committee did not wait for the recommendation to be adopted. It published its “Practical rules for high-quality explanations” in February 2012, the contents of which are highly convergent with the provisions of the recommendation and are based on a similar concern.


Finally, soft law being what it is, the Commission seeks better control mechanisms for the application of the “comply or explain” rule at the national level “in order to motivate companies” (§11).
Ironically, the Commission’s recommendations do not bind Member States (288 TFEU). Member States should report to the Commission by April 2015 about the measures they have taken to comply with the recommendation.


1 Act of 6 April 2010 on the reinforcement of corporate governance in listed companies, Belgisch Staatsblad/Moniteur Belge, 23 April 2010, and Royal Decree of 6 June 2010, Belgisch Staatsblad/Moniteur Belge, 28 June 2010.
2 Art. 526bis of the Belgian Companies Code, introduced by the Act of 17 December 2008, Belgisch Staatsblad/Moniteur Belge, 29 December 2008.
3 Art. 526quater of the Belgian Companies Code, introduced by the Act of 6 April 2010.
4 Art. 96, § 2, 1° of the Belgian Companies Code.
5 Commission Recommendation 2014/208/EU of 9 April 2014 on the quality of corporate governance reporting (“comply or explain”), O.J., L 109, 12 April 2014, pp. 43–47.
6 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies, O.J., L 184, 14 July 2007, pp. 17–24.
7 http://www.corporategovernancecommittee.be/en/tools/explain/.