European Corporate Governance Forum Clarifies Principle

by Ulrika Lomas, for LawAndTax-News.com, Brussels

15 March 2006

The European Corporate Governance Forum, which examines best practices in Member States in the field of corporate governance, on Monday issued a public statement clarifying the 'comply or explain' principle, which obliges companies to justify any deviation from corporate governance codes.

The Forum also issued a report detailing its activities in 2005 and its plans for future activities, such as an exchange with bodies monitoring the application of national corporate governance codes and further work to examine the "one share one vote" concept.

Internal Market and Services Commissioner Charlie McCreevy stated that: "The principle of 'comply or explain' is a central element of EU corporate governance. So it is important to have a common understanding of the principle's scope and of the conditions that need to be put in place for it to work effectively."

The 'comply or explain' principle forms the basis of the European code-based approach to corporate governance. It provides for more flexible and effective market-led regulation. However, there is agreement that 'comply or explain' can work only if its surrounding regulatory framework ensures that companies respect the obligation to give reasons for deviations from the applicable corporate governance codes.

The Forum has therefore undertaken to define in more detail the advantages and the limits of the 'comply or explain' principle from a European perspective. As a first step it has now adopted a common statement on the basic principles that guide the system of 'comply or explain'.

Meanwhile, in its annual report, the Forum sets out the activities that it undertook in 2005, including discussions on the following: recent developments in the Member States in the field of corporate governance; the "comply-or-explain" principle; the role and the rights of shareholders in the company; and rules on internal control and risk management mechanisms.

The Forum announced in its report that in 2006 its work on the role and rights of shareholders will continue, and that in particular it intends to examine in more detail the “one share one vote” concept.

On internal control, the Forum concluded that for the moment there appears to be no need for further concrete steps. However, it will continue to review whether the current approach is sufficient for ensuring that internal controls within the EU meet best practice standards.

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