Corporate governance by principle or rule

Recent developments in corporate governance policies and practices

Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include:

Corporate governance by principle or rule

In its drive to create a single capital market, the European Commission (EU) has continued its quest to harmonize corporate governance rules across member states. Inevitably, it has had to face the dilemma (3E, p477) of whether corporate governance practices should be based on principles, as in the UK’s ‘comply or explain’ approach, or determined by rules backed by law, as in Germany and many other EU states.

This is not a new problem: in 1972, the draft 5th directive, from what was then the European Economic Community would have required major companies in all member states to adopt the German two-tier board system of corporate governance, with employee directors on the supervisory board. It failed, not least because of British commitment to their unitary board system. The EU is now working on a shareholder rights directive that would apply across all member states. If enacted, it would have to be enshrined in the laws of each member state.

Around the world, if any trends can be seen, they are towards corporate governance by rules backed by legislation; for example in the Sarbanes-Oxley and the Dodds-Frank Acts in the United States. Nevertheless, the UK remains strongly committed to the principles not rules approach. In other words, companies should comply with the corporate governance code or explain why they have not done so. Britain is trying to extend this approach to the rest of Europe.

Sir Winfried Bischoff, chairman of the UK’s Financial Reporting Council (FRC), wrote (September 2015): ‘The UK Corporate Governance code recognizes the collective role of the board and makes specific mention of board members and their responsibilities – chief executives, chairmen, and non-executive and executive directors. This is the UK approach and one that Europe is now coming round to. In the last 20 years corporate governance codes have emerged across Europe as public perceptions of boardroom behaviour has widened and come under increasing scrutiny. These codes set out best practice principles for boards and generally operate on a ‘comply or explain’ basis, on the assumption that good corporate behaviour can be accomplished through transparency rather than through hard rules and unnecessary (bureaucratic) burdens.’

The FRC wrote formally to the EU on 26 June 2015 explaining that the FRC sets the framework in the UK of codes and standards for corporate reporting, accounting, auditing, and actuarial and investor communities, including the corporate governance and stewardship codes. It explained how the stock exchange listing rules for major listed companies required them to follow the codes, under the supervision of the Financial Conduct Authority. Details of the work of the FRC and their latest report is available at

Bob Tricker, January 2016


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