The recent wave of corporate governance scandals in the United States and Europe has caused a crisis of confidence in the corporate sector. As a result, corporate governance reform has been on the agenda of researchers, employees, executives, and legislators. The United States adopted the Sarbanes-Oxley Act ("SOX") in 2002, and some European countries have adopted non-binding corporate governance codes. The recent corporate governance reforms can be defined as the different sets of rules/recommendations based on transparency and accountability adopted by several countries aiming at restoring and reinforcing confidence in the corporate sector.
This paper will not address the economic analysis of the new corporate governance provisions themselves. The debate is, however, lively in the United States. Some argue that the costs of SOX far exceed its benefits, or that at least the provisions are not cost-effective.1 This paper will conversely focus on the method of implementing new corporate governance provisions. It will provide an economic analysis of the "comply or explain" approach as recently applied in the Belgian Corporate Governance Code. However, the economic analysis of the implementation method set forth in this paper may also contribute to the core debate in the United States. Many of the criticisms against SOX relate to the fact that the costs to small public companies are disproportional to their benefits and that it does not take into account a company's specific characteristics.2 Instead of calling for substantive amendments of the provisions, one might think about changing the method of implementation and enforcement.
My analysis proceeds in six parts. Part I describes the structure and content of the Belgian Corporate Governance Code and its "comply or explain" mechanism. Part II gives the doctrinal framework of the contractual perspective of corporate law with the possibility to opt out as an essential feature. Part III shows how the "comply or explain" principle is an application of this contractual approach. Part IV deepens the analysis by answering some criticisms and demonstrating that they are either invalid, solvable by minor changes to the current setup, or don't lead to a better alternative. Part V discusses the suitability of the "comply or explain" approach in widely-held shareholder systems (such as the United States and the United Kingdom) versus controlling shareholder systems (rest of the world). The final part distills some general conclusions.
I. The Belgian Corporate Governance Code and Its "Comply or Explain" Principle A
A. History of the Code
On May 21, 2003 the European Commission launched its Action Plan on "Modernizing Company Law and Enhancing Corporate Governance in the European Union."3 The plan stated that it is the responsibility of each individual EU Member State to adopt a code of reference, with which listed companies are to comply or in relation to which they are to explain deviations.4 In Belgium, the Banking, Finance and Insurance Commission (BFIC), the Federation of Enterprises in Belgium (FEB) and Euronext Brussels formed a Corporate Governance Committee to draft a "Code of Best Practice" on corporate governance.5 On June 18, 2004, a first draft was published on the Committee's website and was open for comments by the public until September 15, 2004.6 The public consultation (more than 300 pages of comments were received)7 and the following public debate on corporate governance resulted in important changes to the final Belgian Corporate Governance Code (hereinafter "the Code") published on December 9, 2004.8
B. Structure, Content, and Character of the Code
The Code is based on a "comply or explain" system. It contains a high degree of flexibility by enabling companies to deviate from the provisions subject to an adequate explanation. The Committee realized that in view of a company's varying size, activities, shareholder structure, and culture, departure from the provisions may be justified in particular circumstances. …