Comply or explain

Comply or explain is a regulatory approach used in the United Kingdom, Germany and other countries in the field of corporate governance. Rather than setting out binding laws, government regulators (in the UK, the Financial Reporting Council, in Germany, under the Aktiengesetz) set out a code, which listed companies may either comply with, or if they do not comply, explain publicly why they do not. The UK Corporate Governance Code and the German Corporate Governance Code (or Deutsche Corporate Governance Codex) use this approach in setting minimum standards for companies in their audit committees, remuneration committees and recommendations for how good companies should divide authority on their boards.

The purpose of "comply or explain" is to "let the market decide" whether a set of standards is appropriate for individual companies. Since a company may deviate from the standard, this approach rejects the view that "one size fits all", but because of the requirement of disclosure of explanations to market investors, anticipates that if investors do not accept a company's explanations, then investors will sell their shares, hence creating a "market sanction", rather than a legal one. The concept was first introduced after the recommendations of the Cadbury Report of 1992.

See also

• UK company law
• German company law