The “comply or explain” principle in the Republic of Slovenia

• DOI: https://doi.org/10.1108/CG-09-2017-0230
• Pages: 839-857
• Published date: 15 May 2018
• Date: 15 May 2018
• Author: Danila Djokic,Mojca Duh
• Subject Matter: Corporate governance,Strategy

The “comply or explain”principle in the

Republic of Slovenia

Danila Djokic and Mojca Duh

Abstract

Purpose –This paper aims to provide an overview of the quality of corporate governance (CG)

disclosures in the framework of CGS and the ‘‘comply or explain’’ code principle in Slovenia. It aims to

observe the differences among companies of the prime, standard and entry markets in terms of the

differencesin governance standards and regulatoryframeworks.

Design/methodology/approach –This paper analyzes the historical development, legal

approach and methods used in the regulation of the ‘‘comply or explain’’ pri nciple in Slovenia.

In the 2014 SEECGAN research –Slovenia, we measured the quality of CG by applyin g the

newly created SEECGAN index methodology covering seven segments of CG and assessing

98 attributes. This paper upgrades the results of this research wit h additional case study

research.

Findings –The analysis from 2011 to 2014 on the ‘‘comply or explain’’ principle showed a gradual

improvement of transparencyin Slovenian public companies. The 2014 SEECGAN research–Slovenia

revealedthat the number of specific and high-qualityexplanations of deviations has increased.The study

in this paper showed that the governance practice in some cases is still not in line with code

recommendationsand does not disclose the deviationsfrom the code.

Originality/value –Disclosures of the Slovenian public companies are presented for the period

2004-2018. This paper points out the improvements to be real ized to change unsatisfactory

practices. The measurement of the quality of CG by the 2014 SEECGAN research –Slovenia

introduced a methodology, which couldbe recognized and improved by the EU and/or its member

states.

Keywords Disclosure, Corporate governance, Index, ‘‘Comply and/or explain’’ principle,

Corporate governance code, SEECGAN index

Paper type Case study

1. Introduction

A form of soft regulations in governancecodes has been designed to:

[...] address deficiencies in the corporate governance system by recommending a

comprehensive set of norms on the role and composition of the board of directors, relationships

with shareholders and top management, auditing and information disclosure, and the selection,

remuneration, and dismissal of directors and top managers (Aguilera and Cuervo-Cazurra,

2004, pp. 417-418).

Empirical evidence demonstrates that the introduction of a codehas a positive effect on the

evolution of company governancepractices (Cuomo et al.,2016).

Codes are associated “with an enforcement mechanism that allows companies to deviate

from the code norms, but at the same time requires them to disclose these deviations”

(Talaulicar and Werder, 2008, p. 255).This is the so-called “comply or explain” approach to

the realization of the codes’ voluntary nature (Aguilera and Cuervo-Cazurra, 2009;Cuomo

et al.,2016).

Danila Djokic is based at

Fakulteta za Management

Univerza na Primorskem,

Koper, Slovenia.

Mojca Duh is Professor at

the Faculty of Economics

and Business, University of

Maribor, Maribor, Slovenia.

Received 15 September 2017

Revised 28 September 2017

25 January 2018

4 February 2018

19 February 2018

Accepted 19 February 2018

DOI 10.1108/CG-09-2017-0230 VOL. 18 NO. 5 2018, pp. 839-857, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 839

Some differences have been observed among countries regarding the realization of this

approach in legislative and practical application (compulsory, voluntary explanation of

deviations). Scientists in different countries [members of the European Union (EU) and

others] scrutinize the methods of regulation of the “comply or explain” principle (Albu and

Girbina, 2015;Braendle and Noll, 2006;Cuomo et al.,2016;Hardi and Buti, 2012;

Nerantzidis, 2015;Sergakis, 2013;Zattoni and Cuomo, 2008), and analyze the strengths

and weaknesses of compulsoryor voluntary ways to achieve compliance with the principles

of the codes (Sergakis, 2013), as well as measure the quality of the “comply or explain”

approach (Nerantzidis, 2015).

The first time the quality of corporate governance (CG) was measured in the Republic of

Slovenia (SI) with the newly created SEECGAN index (98 variables) was in 2014. However,

the results failed to directly show compliance or noncompliance with the CG Codes in the

SI. With the new research presented in this article, we wanted to upgrade the established

results regarding the quality of CG. The results of the SEECGAN Research –Slovenia 2014

(Djoki

cet al., 2014) are therefore supplemented with the case study approach about the

“comply or explain” principle. Our research in this article is linked to some other pieces of

research conducted in the SI that are related to the “complyor explain” principle. The article

presents the development of the regulation in the field of soft law in Slovenia as a civil law

country. It assesses the relation with mandatory law and provisions concerning corporate

governance statements (CGSs).The practical consequences of the approach are analyzed

on the basis of the results of CG quality checksof the pieces of research as well.

CG in the SI was and remains generally characterized by two important observations.

Firstly, CG has been evolving only since Slovenia’s independence, which it obtained 27

years ago. Secondly, the implementation of CG after 1990s in the SI has been

characterized by the transformation of the social equity ownership company system to the

private equity ownership company structure. The privatization of equity capital and the

parallel formation of the companies in the traditional forms of the business have been

reached and executed on the basis of “mass privatization processes and regulations”,

which determined the CG process for 20 years(Djoki

c, 2013).

The first-ever code of corporate governance (CG Code) in the SI was signed in 2004 after

the SI joined the EU. Regulations concerning company law, accountancy, the audit system

and financial reporting have been harmonized with the EU regulations ever since. It is

important to note that the implementation of the EU directives and regulations following the

accession of the SI to the EU has brought positive legal effectson CG.

The “comply or explain” principle became a generally used principle in 2007. This

principle has also been included in the wording of a law which established the notion of

CGSs. At the time, the SI started to combine two techniques for creating and

developing CG practice. In addition to the provisions of the valid CG Code, companies

were required by law to explain the use of the “comply or explain” principle in their

CGSs. This fact influenced the preparation and wording of the CG Code in 2009 and

the future CG practice in the SI.

The introductory part of the article is followed by a chapter which discusses the creation

and development of the regulative methods used in CG Codes in the SI as a civil law

country. The differentiation and the assessment of the institutionalization of the CGSs and

the consequences of its mandatory nature are also explained in the framework of this

chapter. The third chapter analyzes the historical development of the practical application

of the “comply or explain” principle. It presents the results of some recent pieces of

research and their explanations. Additional findings are presented in the fourth chapter

through a case study which supplements the previous SEECGAN research 2014 that was

executed by the authors of this article. The article concludes with some conclusions and

provides the basis for further research in Slovenia.

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