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Home > Corporate Governance Viewpoints > The “Comply or Explain” Approach to Improving Standards of Corporate Governance

Corporate Governance Viewpoints

The “Comply or Explain” Approach to Improving Standards of Corporate Governance

by Sir Christopher Hogg


Sir Christopher Hogg was Chairman of the Financial Reporting Council from 1 January 2006 to 1 May 2010. He began his career in industry with Courtaulds in 1968, going on to become Chief Executive in 1979, executive Chairman from 1980, and non-executive Chairman from 1991 to 1996. He was a non-executive director and subsequently Chairman of Reuters Group (1984-2004), SmithKline Beecham and then GlaxoSmithKline (1993-2004), and Allied Domecq (1995-2002). He was a non-executive director of Air Liquide SA from 2000 to 2005.

Sir Christopher was a member of the Department of Industry's Industrial Development Advisory Board from 1976 to 1980 and a non-executive Director of the Bank of England from March 1992 to 1996. He was non-executive Chairman of the National Theatre from 1995 to 2004 and a Trustee of the Ford Foundation from 1987 to 1999.

Sir Christopher is a graduate of Oxford and Harvard and saw active service with the Parachute Regiment in Cyprus and Suez on National Service. Before his career in industry he worked for three years in corporate finance in the City and two years in the public sector.

This article sets out the rationale for and benefits of the “comply or explain” principle by reference to experience in the United Kingdom and identifies some of the factors that influence its effectiveness.

The Rationale for “Comply or Explain”

In 1992, in response to a series of corporate scandals, the United Kingdom introduced what is believed to be the first code setting out best practice in corporate governance. Known as the Cadbury Code, it introduced a new regulatory concept known as “comply or explain,” under which companies have the option either to follow the best practices or to explain to their shareholders why they considered that they were not appropriate in the company’s particular circumstances. Although the Cadbury Code has now been superseded by the UK Corporate Governance Code (which in turn was titled until a review in 2009 as the Combined Code), the “comply or explain” mechanism remains an important part of the system of corporate governance in the United Kingdom.

The “comply or explain” mechanism has also been adopted more widely—particularly, but not only, in other European countries—and in 2006 was enshrined in a European Union Directive. The directive requires all companies listed on EU-regulated markets to comply with the relevant corporate governance code or explain why they have not. While the precise content of these codes varies from country to country, they all address issues such as the role, composition, and effectiveness of the board and its committees, the remuneration of executive directors, risk management and internal control, and communication with shareholders.

There are three primary reasons why the “comply or explain” approach is considered to be more appropriate for addressing most governance issues than more traditional forms of regulation:

  • It leaves decisions about the appropriateness of a company’s governance arrangements in the hands of its management and shareholders. In most cases the primary purpose of good governance is to protect the long-term interests of the company and its owners, so it is right that collectively they should decide how to achieve that objective. In certain companies or sectors there may also be public interest considerations, in which case the arguments for a more traditional approach to regulation may be stronger.

  • While it encourages companies to follow accepted best practice, it recognizes that in certain circumstances it may be appropriate for them to achieve good governance by other means. To be effective, good governance needs to be implemented in a way that fits the culture and organization of the individual company; these can vary enormously between companies depending on factors such as size, ownership structure, and the complexity of the business model. In general, one size does not fit all.

  • By allowing a degree of flexibility, it enables codes to set more demanding standards. It can be more aspirational than legislation. Regulation tends to be written in terms of the minimum necessary requirements in order not to impose unjustified or disproportionate burdens on those being regulated. In contrast, a “comply or explain” code can set out market-leading practices and encourage the rest to aspire to the standards of the best.

  • Codes can also be more easily adapted than regulation to take account of developments in best practice and encourage good practice relating to “softer” issues for which it would be inappropriate to prescribe minimum requirements in law, such as training and support for directors.

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Further reading


  • Financial Reporting Council. “Revisions to the UK Corporate Governance Code (formerly the Combined Code).” May 2010. Online at:
  • Financial Reporting Council. “The UK Corporate Governance Code.” June 2010. Online at:
  • Sants, Hector. “Do regulators have a role to play in judging culture and ethics?” Speech given at the Chartered Institute of Securities and Investments Conference, London, June 17, 2010. Online at:

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