(1)

An effective corporate governance framework is of key importance to society, as well-run companies are likely to be more competitive and more sustainable in the long term. Good corporate governance is first and foremost the responsibility of the company concerned, and rules at European and national level are in place to ensure that certain standards are respected. These include legislation and soft law, namely national corporate governance codes.

(2)

Corporate governance codes aim to establish principles for good corporate governance in listed companies in Europe based on transparency, accountability and a long-term perspective. They provide standards and best practice for companies, enabling them to perform better and therefore contribute to fostering growth, stability and long-term investment.

(3)

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (1) requires companies to include a corporate governance statement in their management report if their transferable securities are admitted to trading on a regulated market of any Member State within the meaning of Article 4(1)(14) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (2).

(4)

The corporate governance statement should provide essential information on the corporate governance arrangements of the company, such as information relating to the relevant corporate governance code(s) applied by that company, the internal control and risk management systems, the shareholder meeting and its powers, shareholders' rights, administrative, management and supervisory bodies and their committees.

(5)

High quality disclosure on companies' corporate governance arrangements offers useful information to investors and facilitates their investment decisions. It also gives investors more confidence in the companies they invest in. Increased transparency to the market can also bring, more generally, reputational benefits for companies and more legitimacy in the eyes of stakeholders and society as a whole.

(6)

The ‘comply or explain’ principle laid down in Article 20 of Directive 2013/34/EU is a key feature of European corporate governance. According to this principle, companies that depart from the relevant corporate governance code are required to explain in their corporate governance statement which parts of the code they depart from and the reasons for doing so.

(7)

While full compliance with a code can send a positive message to the market, it may not always be the best approach for a company from a corporate governance perspective. Departing from a provision in the code could in some cases allow a company to govern itself more effectively. The ‘comply or explain’ approach provides companies with flexibility by allowing them to adapt their corporate governance to their size, shareholding structure or sectoral specificities. At the same time, it promotes a culture of accountability, encouraging companies to reflect more on corporate governance arrangements.

(8)

The ‘comply or explain’ principle is widely supported by companies, investors and regulators as an appropriate tool in corporate governance. Yet, as mentioned in the 2011 Green Paper on the EU corporate governance framework (3), it appears that there are some shortcomings in the way the principle is applied in practice, in particular as regards the quality of explanations provided by companies when departing from corporate governance codes. In this respect, a large majority of respondents to the Green Paper were in favour of requiring companies to provide better quality explanations in case of departures.

(9)

According to more recent evidence gathered by the Commission, there has been gradual improvement in this area. Several Member States have, for instance, initiated discussions or issued guidelines on the quality of explanations. However, there is still scope for further improvement.

(10)

In its resolution of 29 March 2012 (4), the European Parliament considered the ‘comply or explain’ approach a useful tool for corporate governance. In particular, it was in favour of compulsory adherence to a relevant code by the company and requiring meaningful explanations for departures from a code, which should include a description of the alternative measure taken.

(11)

The 2012 Action Plan on European company law and corporate governance (5) underlined the importance of high quality explanations, in particular for investors, and announced a Commission initiative to improve the quality of corporate governance reports and the quality of explanations in particular.

(12)

The purpose of this Recommendation is to provide guidance for companies and to assist them in improving the quality of their corporate governance reporting. Given the diversity of legal traditions and approaches, these recommendations offer a general framework, which can be further developed and adapted to the specific national context.

(13)

This Recommendation applies to companies which are required to submit a corporate governance statement in accordance with Article 20 of Directive 2013/34/EU and which need to provide explanations in case of departure from the recommendations of the corporate governance code(s).

(14)

While this Recommendation is intended predominantly for listed companies pursuant to Article 20 of Directive 2013/34/EU, other entities preparing a corporate governance statement might also benefit from enhancing the quality of information they plan to disclose.

(15)

In addition to the information that they are required to provide in their corporate governance statement, companies in some Member States are also required to report on how they apply the main principles or recommendations of the code. In order to further improve transparency, all European listed companies are encouraged to report on how they followed the relevant codes regarding aspects which may be most important for shareholders. In addition, in order to facilitate access, companies should consider making this information also available online.

(16)

There is no standard format for corporate governance reporting throughout the Union. Presenting information in a general statement or on a provision by provision basis is acceptable as long as it is informative and useful for shareholders, investors and other stakeholders. Companies should avoid making overly general statements, which might not cover important aspects to shareholders but also, box-ticking statements with little informative value. Likewise, they should also avoid providing lengthy information which might not give sufficient insight.

(17)

Appropriate disclosure of departures from the relevant codes and of the reasons for such departures is very important to ensure that stakeholders can make informed decisions about companies. Such disclosure reduces the information asymmetry between the company directors and its shareholders, and therefore, decreases the monitoring costs for the latter. Companies should clearly indicate which recommendations of the code they have departed from and, for each instance provide an explanation regarding: the manner in which the company has departed, the reasons for the departure, the way in which the decision to depart from a recommendation has been arrived at, the timeframe of the departure and the measures taken to ensure that the company action remains consistent with the objectives of the recommendation, and of the code.

(18)

In providing this information, companies should avoid using standardised language and should focus on the specific company context that explains the departure from a recommendation. The explanations should be structured and presented in such a way that they can be easily understood and used. This will make it easier for shareholders to engage in a constructive dialogue with the company.

(19)

An effective ‘comply or explain’ approach requires efficient monitoring to motivate businesses to comply with a corporate governance code or to explain non-compliance. The 2011 Green Paper indicated that the corporate governance statements which companies publish seemed not to be monitored as they should be and few Member States had public or specialised bodies check the completeness of the information provided, and in particular the explanations.

(20)

Various actors, such as boards, auditors and shareholders, are involved in monitoring the information disclosed by companies. Boards and shareholders also have an important role to play in encouraging good quality explanations. In particular, more active monitoring by shareholders, as owners of companies, could lead to better corporate governance practices.

(21)

Member States and bodies responsible for corporate governance codes are also encouraged to consider how more attention could be paid to the overall quality of explanations for departures submitted by companies in the context of the existing monitoring arrangements in their countries. Additional means of incentivising companies and other parties concerned could also be considered, to further improve the quality of the explanations and of corporate governance reporting in general.

(22)

In order to ensure efficient follow-up to this Recommendation, Member States should draw it to the attention of the bodies responsible for the national corporate governance codes, listed companies and other parties concerned. Member States should also inform the Commission about measures taken in accordance with this Recommendation,