Does the “capstone” of the “comply or explain” system work in practice? Evidence from Athens Stock Exchange

• DOI: https://doi.org/10.1108/CG-10-2017-0239
• Pages: 911-930
• Date: 26 April 2018
• Published date: 26 April 2018
• Author: Georgios L. Thanasas,Georgia Kontogeorga,George Asterios Drogalas
• Subject Matter: Corporate governance,Strategy

Does the “capstone”of the “comply or

explain”system work in practice?

Evidence from Athens Stock Exchange

Georgios L. Thanasas, Georgia Kontogeorga and George Asterios Drogalas

Abstract

Purpose –In recent years, the principle of the ‘‘comply or explain’’ approach has become the trend in

corporate governance statements that are not fully compliant with national codes. This is because managers

of companies deviating from corporate governance codes try to be lawful, providing reasonable

explanations; thus, they reach an impasse, copying explanations from other companies, in a mimetic

behavior. The purpose of this study is to investigate whether companies listed in Greek Stock exchange

tend to imitate one each other thus to be legitimate in terms of the ‘‘comply or explain: approach’’.

Design/methodology/approach –This study focuses on the ‘‘comply or explain’’ approach in Greek listed

companies, analyzing statements by 162 companies (80.2 per cent) listed on the Athe ns Stock Exchange

(ASE), showing a total of 1,211 deviations from the national code. Therefore, th e explanations were classified

for analysis, grouping them into three main categories and investigat ing the degree of imitation.

Findings –In total, 96 companies deviating from the Code (56.3 per cent) provided explanations as to t heir

legitimacy practices. Thus, the managers of these companies tried to explain thei r deviations from the national

code in such a way that it could be considered that they tend to imitate each other, striving to be lawful.

Research limitations/implications –Owing to Greece’s ongoing economic crisis, many companies

listed on the ASE in previous years have suspended the trading of their shares. An examination of

previous years may have led to biased results, owing to the different samples of companies. Another

limitationconcerns the number of companies in thesample; although it covers almost 80 per cent of listed

companies,the actual number of companies is not big enough.

Practical implications –This study tries to investigatewhether Greek listed companies comply with or

deviate from the National Corporate Governance Code. For that purpose, context analysis was

performed on 80.2 per cent of these companies(162 out of 202 companies) for the calendar year 2017.

Most companies triedto explain their deviations from the Code in such a way that it could be considered

that theytend to imitate each other.

Social implications –Companiesthat deviate from the corporate governance code tend to imitateeach

other. This phenomenonoccurs mainly in small companies, which, whilestriving to be lawful, even copy

other companies’phrases verbatim. This studyreveals that managers of such companiescare to provide

an explanation for onlydeviations from the Code as a logical justificationand not to capture the existing

situationof their companies.

Originality/value –This study is the first to examine the mimetic behavior on corporate governance

statements in Greece. Althoughthe trend of imitation is a fact in developed economies, similar studies

never took placeon emerge economies. This study contributesto the literature by examining whether the

trend of mimeticbehavior exists in emerging economies as well.

Keywords Legitimacy, Compliance, Corporate governance codes, Mimetic behaviour,

Quality of explanations

Paper type Research paper

1. Introduction

Nowadays, it is essential forcompanies listed on the stock exchange to disclose information

on their performance. Diouf and Boiral (2017) marked that 53 per cent of the 500 largest

Georgios L. Thanasas is

Assistant Professor at the

Department of Accounting

and Finance, Technologiko

Ekpaideutiko Idryma

Dytikes Elladas,

Mesolonghi, Greece.

Georgia Kontogeorga is

Board Member in IBAN at

the International Board of

Auditors, NATO Science

and Technology

Organization, Brussels,

Belgium. George Asterios

Drogalas is Assistant

Professor at the

Department of Business

Administration, University

of Macedonia, Thessaloniki,

Greece.

Received 30 September 2017

Revised 1 October 2017

28 March 2018

4 April 2018

5 April 2018

Accepted 6 April 2018

DOI 10.1108/CG-10-2017-0239 VOL. 18 NO. 5 2018, pp. 911-930, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 911

companies listed on the US Stock Exchange and 93 per cent of the 250 largest companies

around the world publish sustainability reports. Sustainability reporting is more than a trend;

a practice used in common and along with the Global Reporting Initiative indicators, it

improves standardization(Diouf and Boiral, 2017;Berman et al.,2003).

Although each country may introduce its own sustainability practices and despite the

differences that may occur, the Global Reporting Initiative sets the base for sustainability

reporting (Schaltegger et al.,2014). This is a benchmark for comparing information among

various companies, providing investors with information about corporate sustainability and

performance (Marimon et al., 2012). Indeed, the quality of information provided by financial

statements, as well as the reliability of sustainability reports, is disputed in the literature

(Diouf and Boiral, 2017;Choet al.,2012;Hopwood, 2009;Milne and Gray, 2007).

As Diouf and Boiral (2017, p. 645) remarked:

[...] the main objective of the Global Reporting Initiative (GRI) (2006), is to provide a trusted and

credible framework for sustainability reporting that can be used by organizations of any size,

sector, or location.

As a result, corporate governance codes have been introduced around the world to apply

good governance practices. As Nerantzidis (2015) noted, a good governance practice may

mean different things to different people according to their point of view; it depends on the

development a country has (Weimer and Pape, 1999). Thus, each country has a set of

corporate governance procedures comprising legal and financial factors, corporate

ownership structure, culture and economic situation of the country (Davies and Schlitzer,

2008).

Corporate governance codes were introduced because of corporate mismanagement

(Enrione et al.,2006). The code that is applicable in one country may vary from that

applicable to another, but all rules of codes are based on the “comply or explain” principle

(Hooghiemstra and Van Ees, 2011;Haxhi and Van Ees, 2010;Seidl, 2007). This principle

was introduced by the Cadbury Report and promoted by national and supranational

organizations around the world, including the European Union, through Directive 2006/46/

EC (Nerantzidis, 2015;Nerantzidis and Filos, 2014;Seidl et al.,2013).

The “comply or explain” principle allows companies to choose whether to fully comply with

the applicable corporate governance codes. In case of non-compliance with the Code’s

provisions, explanations should be given according to the “comply or explain” system.

Although deviations from the Code are possible, upon provision of explanations, these

explanations have been “largely neglected” (Solomon, 2010, p. 156), and thus, this self-

regulated system is open to abuse (Wymeersch, 2005). Therefore, it is essential to examine

the quality of explanations provided by companies for non-compliance (Shrives and

Brennan, 2015).

Although the “comply or explain” approach is a trend in companies operating in developed

countries, very little research has been made to understand how it works in practice (Seidl

et al., 2009;Aguilera and Cuervo-Cazurra, 2004). On the other hand, there are many

surveys on compliance rates (Von Werder and Talaulicar, 2010;Akkermans et al.,2007;

Von Werder et al.,2005), along with correlations between company performance and

compliance rates, share prices and company size (Andres and Theissen, 2008;Alves and

Mendes, 2004;Bauer et al., 2004;Drobetz et al.,2004;Gompers et al., 2003), while no

research has been conducted on the different ways in which companies use the “explain”

option, when deviating fromthe provisions of the Code (Seidl et al.,2013).

This paper aims to contribute to the “comply or explain” principle, by examining the quality

of information provided by companies listed in Greece’s stock exchange. Extensive

research has been conducted on examining compliance with best practices

(Abdelkarim and Ijbara, 2010;Florou and Galarniotis, 2007;Tsipouri and Xanthakis, 2004;

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