Seeking Legitimacy Through Complying with Corporate Governance Codes: An Analysis of ‘Comply or Explain’ Disclosures by Companies in the French SBF 120

Abstract

The ‘comply or explain principle’ was designed to improve corporate governance practices of listed companies through a flexible regulatory regime that forwarded certain values propagated by ‘best practices’ codes of corporate governance such as board independence or discipline in executive pay. Our research suggests, however, that ‘comply or explain’ hardly disciplines corporate behaviour and that companies rather use compliance disclosures in a symbolic fashion in order to gain or regain investor trust, in particular when and where trust may have eroded: Next to reporting incidents of inaccurate disclosures we examine the compliance declarations contained in the 2008 annual reports of major French firms and use a Logit regression to show that ‘displayed compliance’ depends on certain company characteristics. We demonstrate that banks and insurance companies displayed more compliance than other companies during the financial crisis; family- or individually-controlled companies took more care to report compliance with code provisions on board independence than did other companies where board dominance is less suspected. Further we show that companies tailor their disclosures to the expectations and information-processing capacities of potential disclosure addressees: Companies with more international exposure (large companies and companies in the CAC 40) adjusted their disclosure format to international standards; they exceeded French legal requirements. Further, we establish that a heavy institutional- and employee-shareholder presence accounts for lower rates of reported compliance, as such companies may be more cautious about making compliance statements if they are accountable to shareholders who are in a position — and may have reason — to contradict these statements. On the basis of our observations, we suggest that future research should focus on how ‘comply or explain’ functions as an element of dialogue and critical questioning between companies and interested stakeholders in the field of corporate governance.