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Governance Authority
Category: Governance Codes and Frameworks

Comply or Explain

Also known as: Comply-or-explain approach, Comply or explain principle
Simply put

Comply or explain is a reporting approach used in many corporate governance regimes. Under it, a company either follows the provisions of a governance code and states that it has complied, or it departs from a provision and provides a clear explanation of why it has not. This gives organisations flexibility to follow the rules or account for why they have taken a different path.

Formal definition

Comply or explain is a governance reporting mechanism, typically attached to a corporate governance code, under which an issuer must either confirm compliance with the code's provisions or, where it departs from them, disclose the departure and give a clear explanation. Under certain frameworks, an effective explanation describes the specific circumstances and states the reasons for non-compliance or inability to comply. The approach is generally designed to accommodate variation across individual companies, allowing the market to assess whether a given standard is appropriate to the entity, rather than imposing uniform, prescriptive compliance. Its status and specifics vary by jurisdiction, sector, and entity type, and in some regimes the underlying disclosure obligation is a legal requirement while the code provisions themselves are non-binding.

Why it matters

Comply or explain sits at the heart of many principles-based governance regimes, and it shapes how boards and investors interact around governance standards. Rather than imposing uniform, prescriptive rules on every company, the approach lets an organisation either confirm it follows a code's provisions or depart from them and explain why. This flexibility acknowledges that a standard appropriate for a large listed issuer may not suit a smaller or differently structured entity, and it places the burden on the market, shareholders, analysts, and other stakeholders, to assess whether a given explanation is credible and whether the departure is justified in the circumstances.

For boards and general counsel, the quality of an explanation matters as much as the fact of compliance. Under certain frameworks, an effective explanation begins by describing the specific circumstances and then states the reasons for non-compliance or the inability to comply. A vague or boilerplate explanation can undermine confidence just as a substantive departure might, because it signals that the board has not genuinely engaged with the standard or its rationale. The approach therefore functions as a disclosure discipline rather than a loophole: departure is permitted, but it must be accounted for transparently.

The status of comply or explain varies by jurisdiction, sector, and entity type. In some regimes the underlying disclosure obligation is a legal requirement even though the code provisions themselves are non-binding, meaning a company may be legally required to report whether it complies while remaining free to depart from individual provisions. Governance professionals should not assume the approach operates identically across markets, and whether any particular departure is appropriate remains a matter of facts, the applicable regime, and professional judgment.

Who it's relevant to

Boards and their committees
Boards typically carry oversight responsibility for how a company reports against a governance code, including decisions to depart from specific provisions and the quality of the accompanying explanation. Directors should ensure that any explanation genuinely describes the circumstances and states the reasons for non-compliance, rather than relying on boilerplate, since the credibility of the disclosure reflects on the board's engagement with governance standards.
General counsel and company secretaries
Legal and secretariat functions generally advise on whether the disclosure obligation attached to a comply or explain regime is a legal requirement in the relevant jurisdiction, even where the code provisions themselves are non-binding. They often draft or review the compliance statement and explanations, and confirm that reporting meets the applicable regime's expectations, which vary by jurisdiction, sector, and entity type.
Compliance officers
Compliance functions help track which code provisions apply, whether the company complies, and where departures require explanation. Because the approach increasingly relates to both governance and ESG regulations, compliance teams may need to monitor how comply or explain obligations evolve across different codes and frameworks over time.
Investors and market participants
The approach is designed to let the market decide whether a set of standards is appropriate for a given company. Investors, analysts, and other stakeholders rely on comply or explain disclosures to assess the credibility of any departure and to form their own view on whether the explanation is sufficient in the circumstances.

Inside Comply or Explain

Underlying Provision or Code Standard
A recommended practice set out in a governance code or framework, generally non-binding in itself. Under a comply-or-explain regime, the entity is expected either to apply the provision or to disclose why it has not.
Disclosure of Compliance Status
A statement, typically in the annual report or governance statement, indicating which provisions have been applied and which have not during the relevant period.
Explanation for Departure
Where an entity does not apply a provision, a meaningful, entity-specific explanation of the reasons for departure and, in many frameworks, how the entity's alternative arrangements still achieve the underlying objective.
Regulatory or Listing Hook
In many jurisdictions the obligation to report against a code on a comply-or-explain basis is itself imposed by binding rules, such as listing rules or securities regulations. The reporting duty may be mandatory even where the individual code provisions are not.
Board Accountability for the Statement
Responsibility for the accuracy and quality of the governance statement and any explanations typically rests with the board, with management supporting the preparation of disclosures.
Reader Assessment
The regime relies on shareholders, investors, and other stakeholders to evaluate the adequacy of explanations and to engage with or hold the entity accountable, rather than on a regulator prescribing a single approach.

Common questions

Answers to the questions practitioners most commonly ask about Comply or Explain.

Does 'comply or explain' mean a company can simply opt out of governance code provisions whenever it chooses?
No. 'Comply or explain' is not a licence to ignore code provisions at will. The mechanism generally requires that where an entity departs from a provision, it provides a considered, specific explanation of what it has done instead and why that approach is consistent with good governance. In many jurisdictions the obligation to report against the relevant code is itself a listing or regulatory requirement, even though the individual code provisions are not binding law. The flexibility applies to the method of compliance and to justified departures, not to whether the entity engages with the code at all.
Is an 'explanation' just as acceptable as compliance, so the quality of the explanation does not really matter?
Not in practice. The model rests on the premise that a meaningful, transparent explanation allows shareholders and other stakeholders to assess a departure and hold the board accountable. A vague, boilerplate, or purely formulaic explanation is generally viewed as weak because it defeats the purpose of the disclosure. Investors and, in some markets, regulators or monitoring bodies typically scrutinise the substance and specificity of explanations. The framework treats a genuine departure with a robust rationale differently from an unexplained or poorly justified one; the burden effectively shifts to the entity to make its case.
Who within the organisation is responsible for deciding whether to comply or to explain, and for drafting the explanation?
Accountability for the governance disclosure generally rests with the board, since it typically owns the entity's governance arrangements and approves the annual report in which the statement usually appears. Management and the company secretary or governance function commonly do the preparatory work, assessing the entity's practices against the code, identifying departures, and drafting the statement, but the board or a relevant committee ordinarily reviews and approves it. The specific allocation depends on the entity's structure, its committee terms of reference, and applicable requirements, so this should be confirmed against the organisation's own arrangements.
Where and when is a 'comply or explain' statement typically disclosed?
Under many codes, the statement appears in the entity's annual report and accounts, and sometimes on its website, covering the reporting period in question. The precise location, timing, and format usually depend on the applicable code and any associated listing or regulatory reporting rules in the relevant jurisdiction. Because these requirements vary by market and entity type, an organisation should confirm the exact disclosure obligations that apply to it rather than assume a single universal standard.
What generally makes an explanation for a departure more credible to investors?
Explanations are typically regarded as stronger when they set out the specific context of the departure, identify the provision not followed, describe the alternative arrangement adopted, explain how that arrangement still meets the underlying governance objective, and, where relevant, indicate whether the departure is time-limited or permanent. Generic language that could apply to any company tends to be less persuasive. The aim is to give readers enough information to make their own judgement about whether the entity's governance remains sound. What counts as sufficient will depend on the facts and on the expectations of the entity's investor base.
How should an organisation handle a departure it expects to continue over multiple reporting periods?
Where a departure is ongoing, entities generally revisit the position each reporting cycle rather than repeating an identical statement without review. Good practice commonly involves reassessing whether the alternative arrangement remains appropriate, updating the explanation to reflect any changes, and, where applicable, noting any intention or timeline to move toward the code provision. Because the mechanism depends on transparency and continued accountability to shareholders, treating the disclosure as a live matter of board judgement is typically more defensible than a static, unchanged explanation. Specific expectations depend on the applicable code and jurisdiction.

Common misconceptions

Explaining a departure is a lesser or non-compliant option that regulators or investors will penalize by default.
In a comply-or-explain regime, a considered departure accompanied by a clear, specific explanation is generally a legitimate and contemplated outcome, not a breach. The regime treats explanation as an equally valid response, though the quality of the explanation is what stakeholders assess.
Because the code provisions are non-binding, the entity has no enforceable reporting obligation.
While individual provisions may be voluntary standards rather than law, the duty to report on a comply-or-explain basis is often itself a binding requirement under listing rules or regulation in many jurisdictions. Whether and how it applies depends on the entity type, sector, and jurisdiction.
Comply-or-explain converts a principles-based code into a rules-based mandate that must be fully complied with.
The mechanism is designed to preserve flexibility. It allows entities to adapt governance arrangements to their circumstances rather than requiring uniform, mandatory compliance, distinguishing it from a strictly rules-based regime.

Best practices

Provide entity-specific explanations for any departure, describing the reasons and how alternative arrangements address the objective behind the provision, rather than using boilerplate language.
Confirm which reporting obligations are binding in the relevant jurisdiction and for the entity type, distinguishing the mandatory duty to report from the voluntary nature of individual provisions.
Ensure the board reviews and takes ownership of the governance statement and its explanations, with management supporting preparation and verifying accuracy.
Revisit each departure periodically to confirm the underlying rationale still holds, and update disclosures when circumstances change.
Engage with shareholders and stakeholders on significant departures so explanations reflect and respond to investor expectations.
Treat comply-or-explain as an opportunity to demonstrate tailored, well-reasoned governance rather than defaulting to full adoption without considering whether it suits the entity's circumstances.