What is the underlying principle of the corporate governance code in most markets?

The underlying principle of the corporate governance code in most markets is "comply or explain." This principle mandates that companies either comply with the established governance guidelines or explain why they have not done so. This approach allows for flexibility while encouraging transparency and accountability in corporate governance. Flexibility and Adaptability: The "comply or explain" approach provides companies with the flexibility to adapt the guidelines to their specific circumstances. If a company believes that a certain recommendation is not suitable for its situation, it can choose not to comply, provided it explains the reasons for this decision. Transparency: By requiring companies to explain their non-compliance, this approach promotes transparency. Stakeholders, including investors, can assess the company’s governance practices and make informed decisions based on the explanations provided. Encouragement of Best Practices: This principle encourages companies to strive towards best practices in governance, while allowing for deviations when justified. It balances the need for high standards with the recognition that one size does not fit all.
Reference: MSCI ESG Ratings Methodology (2022) - Discusses the principles of corporate governance codes and highlights the "comply or explain" approach as a common standard in various markets​​. ESG-Ratings-Methodology-Exec-Summary (2022) - Provides insights into how corporate governance codes are designed to promote transparency and accountability through the "comply or explain" principle​​.