Probes Into The "Comply Or Explain" Approach Of Corporate Governance Codes

Rules of mandatory corporate governance possess the defects of rigidity and high legal costs. However, complete enabling rules have some other flaws as well. Therefore, more and more countries and scholars are inclined to search for a mode integrating the advantages of these two kinds of rules, which is the"Comply or Explain"Approach as a result. On the basis of enabling rules,"Comply or Explain"Approach combines obligations of compulsory disclosure, which means that nonobservance has to be explained. It makes the most of the flexibility and independence of enabling rules. In addition, the mechanism of corporate external governance can be functioned with high efficiency.This dissertation includes five parts.Chapter One introduces the concept and main content of"Comply or Explain"Approach and its applications in different countries as well. This mode demonstrates its applicability: with reference to the corporate governance rules of promulgation, companies can choose either to completely abide by these rules, or not to comply with some improper provisions. As for the latter, however, corresponding disclosure and explanation are required in periodic reports. The implementary objects of"Comply or Explain"Approach are mainly listed companies. It is a partially enabling or hybrid structure, where the adoption of governance practices is optional but disclosure regarding governance practices is mandatory. At present, this mode has already been widely implemented by United Kingdom, Germany, Belgium and some other countries.Chapter Two principally analyses the justification of"Comply or Explain"Approach from the aspects of Characteristics of Contract, legal costs and profits. According to corporate contract theory, companies can be considered as a series of Nexus of Contracts. The issues of corporate governance are essentially to build up a series of scientific and reasonable contract arrangement, to reduce agency costs and to maximize residual usufruct. Thus corporate governance regulations should possess the attributes of enabling regulations. Since every law has its own costs and profits, reasonable and scientific"Good Law"ought to minimize legal costs while increasing legal incomes as much as possible. Compared with huge costs and income uncertainty of compulsory regulations, the lower costs and higher profits provided by enabling regulations of"Comply or Explain"Approach make it obviously advantaged.Chapter Three is conducted to analyze the important value of"Comply or Explain"Approach when it helps companies find out corporate governance measures which are most suitable to their own characteristics. Considering differences among companies from a variety of aspects, such as equity structure, scale and size, organization structure, industry characteristics, financing method, etc., corporate governance has the feature of individuality. Whereas companies'participants have benignant motivations and information advantages, they are the best designers of corporate governance measures."Comply or Explain"Approach reduces the costs of"try and error"and accelerates the process of"try and error"through translating centralized"try and error"into distracted one under compulsory criteria. Meanwhile, it not only increases corporate governance consciousness of companies'participants but also brings the competition of corporate governance, all of which accelerate to discover the optimal corporate governance mode.Chapter Four Compared with compulsory regulations, freedom-to-opt-out under"Comply or Explain"Approach, to certain extent, enables corporate directorate and management to expand their rights. However, market mechanism, including products and services market, capital market, market for corporate control, managerial labor market, etc., essentially motivates corporate directorate and management to reduce opportunism behaviors and to optimize corporate governance structure. At the same time, obligations of compulsory disclosure and explanation, through optimizing information transfer in securities market, improving investors'ability to analyze information and enhancing market attention, consequently strengthen the function of market executive mechanism. Moreover, the compulsory abidance of regulations of principles is able to preferably remedy limitation of market mechanism on its own, thus to form a better harmonic mechanism.Chapter Five aims to analyze several comments on query to"Comply or Explain"Approach and to clarify the doubts of this mode from academe. Meanwhile, combining some problems of governance regulations of listed companies in our country at present, the author puts forward several legislation suggestions that decision-making subject of listed companies'governance should be corporate participants, that regulations of listed companies'governance should gradually step up characteristics of soft law, and that the disclosure of corporate governance information needs to be explained.