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Brigitte Haar

Shareholder wealth or stakeholder interests? The alignment of these two has been at the centre of self-regulation that has resulted from the increase in the number of corporate governance codes since the turn of the century. Mandatory ‘comply or explain’ is one of the principal ideas underlying the implementation of corporate governance codes in Europe. It combines flexibility and voluntariness of compliance with an obligation to give reasons for any deviation from code recommendations. Hence, codes of corporate governance are not legally binding in most legal systems. At the same time, however, and in accordance with the legislators’ intent, disclosure under the comply or explain principle serves as a self-enforcing market-based mechanism, which displays certain parallels with the corporate law and economics paradigm. The European Commission’s recent calls for improvements in the explanations for noncompliance imply that well-reasoned noncompliance is a sine qua non for the functioning of the comply and explain principle, giving real meaning to it and making a ‘culture of departure’ desirable. Therefore this raises the important question of what is driving code compliance and the underlying legitimacy of corporate governance codes. There may be rules that motivate corporate behaviour, but do not greatly affect corporations’ material interests. This aspect of compliance could open the door to extend the analysis beyond shareholder wealth maximisation to include stakeholder interests. As a starting point, the chapter will explore the significance of the comply or explain principle and its underlying enforcement mechanisms more generally. Against this background, an examination of compliance rates will shed light on companies’ reasons for following the code. The chapter analyses the rates of compliance with distinct provisions of the German Corporate Governance Code. Code provisions that exemplify the current corporate governance debate and the legitimacy problems that are raised include those regulating incentive pay, severance pay caps and age limits for supervisory board members. Analysis of these will lay the basis for an answer to the question of what motivates companies to comply with the code. Identifying that motivation could then pave the way to specifying what determined the regulatory evolution of the code and the range of stakeholders and their concerns.