Scope (subject) of analysis and major findings of the research on corporate governance codes in Slovenia.
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Barely three months into the new year and we are happy to announce a monumental milestone reached - 150 million downloads.
\n\nThis achievement solidifies IntechOpen’s place as a pioneer in Open Access publishing and the home to some of the most relevant scientific research available through Open Access.
\n\nWe are so proud to have worked with so many bright minds throughout the years who have helped us spread knowledge through the power of Open Access and we look forward to continuing to support some of the greatest thinkers of our day.
\n\nThank you for making IntechOpen your place of learning, sharing, and discovery, and here’s to 150 million more!
\n\n\n\n\n'}],latestNews:[{slug:"step-in-the-right-direction-intechopen-launches-a-portfolio-of-open-science-journals-20220414",title:"Step in the Right Direction: IntechOpen Launches a Portfolio of Open Science Journals"},{slug:"let-s-meet-at-london-book-fair-5-7-april-2022-olympia-london-20220321",title:"Let’s meet at London Book Fair, 5-7 April 2022, Olympia London"},{slug:"50-books-published-as-part-of-intechopen-and-knowledge-unlatched-ku-collaboration-20220316",title:"50 Books published as part of IntechOpen and Knowledge Unlatched (KU) Collaboration"},{slug:"intechopen-joins-the-united-nations-sustainable-development-goals-publishers-compact-20221702",title:"IntechOpen joins the United Nations Sustainable Development Goals Publishers Compact"},{slug:"intechopen-signs-exclusive-representation-agreement-with-lsr-libros-servicios-y-representaciones-s-a-de-c-v-20211123",title:"IntechOpen Signs Exclusive Representation Agreement with LSR Libros Servicios y Representaciones S.A. de C.V"},{slug:"intechopen-expands-partnership-with-research4life-20211110",title:"IntechOpen Expands Partnership with Research4Life"},{slug:"introducing-intechopen-book-series-a-new-publishing-format-for-oa-books-20210915",title:"Introducing IntechOpen Book Series - A New Publishing Format for OA Books"},{slug:"intechopen-identified-as-one-of-the-most-significant-contributor-to-oa-book-growth-in-doab-20210809",title:"IntechOpen Identified as One of the Most Significant Contributors to OA Book Growth in DOAB"}]},book:{item:{type:"book",id:"576",leadTitle:null,fullTitle:"Arc Welding",title:"Arc Welding",subtitle:null,reviewType:"peer-reviewed",abstract:"Ever since the invention of arc technology in 1870s and its early use for welding lead during the manufacture of lead-acid batteries, advances in arc welding throughout the twentieth and twenty-first centuries have seen this form of processing applied to a range of industries and progress to become one of the most effective techniques in metals and alloys joining. 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Numerous research studies in the corporate governance (CG) field are based on a universal model outlined by principal-agent theory where central premise is that shareholders and managers have different objectives and different access to firm-specific information. Self-interested managers as agents of shareholders (principals) have the opportunity to take actions that benefit themselves, and shareholders are those that bear the costs of such actions (i.e. agency costs) [1, 2]. In many countries, not only managers but also controlling shareholders can expropriate minority shareholders and creditors [3, 4]. Several mechanisms are proposed to resolve principal-agent problems such as monitoring by boards of directors or large outside shareholders, equity-based managerial incentives or the market for corporate control [1, 2, 5]. These different types of control and monitoring in companies are referred to as corporate governance [2, 6].
\nMany cases of corporate fraud, accounting scandals and other organizational failures leading to lawsuits, resignations or even bankruptcy have made corporate governance as especially important and often discussed topic among professionals and scholars. The main feature of many of these cases is the assumption that the system of checks and balances designed to prevent potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders failed [2]. Several formal regulations and informal guidelines, recommendations, codes and standards of corporate governance have been established or improved in order to determine good corporate governance. These efforts to improve corporate governance practices have raised an important dilemma within the corporate governance field, whether to develop hard law (i.e. mandatory requirements, hard regulations and regulatory approach) or soft law (i.e. voluntary recommendations, soft regulations and market-based approach) in order to improve corporate governance across countries [7, 8]. In this contribution, we explore governance codes that are a form of soft regulations (i.e. soft law) presenting a set of voluntary best governance practices without the force of law [7, 9, 10]. The issue of the Cadbury Report and the Code of Best Practices in the UK importantly affects the diffusion of codes around the world after 1992 [7], and similar effects on new codes’ creation or revision of the existing ones can be observed after 2008 due to the global financial crisis [10].
\nThe number of research studies on codes of good governance has considerably expanded after 1992 and especially in the early 2000s [7, 10]. Because of the voluntary nature of the majority of codes, there has been a considerable debate in the literature on whether the code recommendations affect the corporate governance quality [7, 8]. Research studies demonstrate that the introduction of corporate governance standards in the form of a code has positive effects on the evolution of governance practices [10] and especially on transparency and disclosure [8, 11].
\nThe aim of this contribution is to broaden our understanding on the role of corporate governance codes in improving corporate governance practice. We explore how the introduction of corporate governance code influences the corporate governance quality in the case of Slovenia. We selected the case of Slovenia due to the lack of research that would address codes’ evolution and their adoption in the transition economies [12]. Slovenia is one of the transition countries that present a large sub-category of emerging economies [13]. As a new European state, it was founded in 1991, and has been in last decades under several transition processes [12, 14, 15]. Even though some authors [16] claim that Slovenia is no more a transition countries since it joined the European Union (EU), several indicators show that economic transition from routine to innovative economy and society has not been finished yet in this country [17, 18]. In the case of Slovenia, we limit our research on the corporate governance codes, which were created at the national level as the result of joint efforts of the Ljubljana Stock Exchange (LJSE), the Managers’ Association of Slovenia and the Slovenian Directors’ Association. We did not explore any other codes and their adoption in the governance practice of Slovenian companies that are relatively free in selecting their governance code.
\nThe paper is divided into several sections. Following the introduction section, the literature review on corporate governance codes is conducted followed by the study of the case of Slovenia. In order to provide a comprehensive insight into the introduction of corporate governance codes in Slovenia and their impact on the quality of corporate governance practice in Slovenian companies, we explored the corporate governance framework in Slovenia and conducted comparable analysis of data on the codes adoption in Slovenian companies. Concluding section highlights the most important findings, implications for research and practice, and future research directions.
\nA universal model outlined by principal-agent theory dominates the corporate governance research field. Its central premise is that shareholders and managers have different interests and objectives as well as different access to specific information of a company. That is a way self-interested managers have the opportunity to take actions that benefit themselves, and shareholders are those that bear the costs of these actions. Such costs are referred to as agency costs [1, 2]. In many countries, it has been noted that not only managers but also controlling shareholders (both are also referred as insiders) can expropriate minority shareholders and creditors (referred also as outsiders) [3, 4].
\nSeveral scholars [1, 5] criticize the closed-system approach within agency theory that implies a universal and direct linkage between corporate governance practices and performance and devotes little attention to the distinct contexts in which companies function. They claim that the structure of governance systems is influenced by several external forces such as efficiency of local capital markets, legal tradition, and reliability of accounting standards, regulatory enforcement, and societal and cultural values [2, 19, 20]. Research studies show that there are substantial variations in institutional environments that shape the degree and nature of agency conflicts and the effectiveness of corporate governance mechanisms [21, 22].
\nSchiehll et al. [22, p. 180] suggest that corporate governance system should be viewed as ‘bundles of interrelated or even intertwined external (country-level) and internal (firm-level) forces, which provide structures and processes of the relationship between firm’s management and stakeholders’. They also apply the term national governance bundles, which are ‘configurations of governance mechanisms that simultaneously operate at the firm and national levels to govern firms within an overall economy or collection of economies’ (p. 180). The historical path dependence among country- and firm-level mechanisms results in a variety of country- and organization-specific governance systems that are effective within the institutional environments in which they have been developed [23].
\nTherefore, we believe that understanding of attempts in distinguishing and describing different institutional environments and corporate governance systems enables us to more appropriately asses the role of corporate governance codes in improving corporate governance practices.
\nWhen distinguishing corporate governance systems, two perspectives should be considered based on the role of companies in the society [2, 24]. Taking a shareholder perspective, where a company’s primary obligation is to maximize shareholder value, effective corporate governance should protect shareholders from being expropriated by the management [2, 24]. The system of corporate governance in the Anglo-Saxon countries is characterized as a shareholder-based system [2, 24] and the law strongly protects shareholders [20]. Anglo-Saxon countries’ firms are relatively widely held (low ownership concentration). It is estimated that in the USA and the UK, the largest five shareholders hold on average 20–25% of the outstanding shares. Due to this fact, on one hand less mechanisms shareholders can use effectively to influence managerial decision-making in a direct manner [24], but on the other hand ‘interdependence among institutions may lead to substitution among functionally equivalent corporate governance mechanisms’ [5, p. 980]. Examples include takeover markets in the USA and the UK, where external governance in the form of the market for corporate control with the takeover threat presents disciplining mechanisms for managers [5].
\nIn most European and Asian countries, the stakeholder-based systems prevail [2, 24]. From stakeholder perspective, where a company has a societal obligation that goes beyond increasing shareholder value, effective governance should ‘support policies that produce stable and safe employment, provide acceptable standard of living for workers, mitigate risk for debt holders, and improve the community and environment’ [2, p. 9]. In the majority of these countries, ownership concentration is significantly higher than in Anglo-Saxon countries [25]. For example, in Germany the largest five shareholders hold on average 41% of the outstanding shares [24]. Concentrated ownership on one hand may reduce agency costs stemming from the separation of ownership and control, but on the other hand may induce new conflicts that arise between majority and minority shareholders. The primary agency problem in this institutional context is the possible expropriation of minority shareholders by the controlling shareholders such as related-party transactions [5]. Therefore, in countries where a vast majority of companies has a concentrated ownership and control structure, the function of corporate governance regulation is to minimize the extent of agency problems between majority and minority shareholders and that between shareholders and creditors [24]. As noted by Larcker and Tayan [2, p. 9] ‘the governance system that maximizes shareholder value might not be the same as the one that maximizes stakeholder value’.
\nIn relation to the previously discussed perspectives, scholars often made division of corporate governance systems between the Anglo-American and the Continental European system. While short-term equity finance, dispersed ownership, stronger shareholder rights, active market for capital control and flexible labour market characterize the first one, the Continental European corporate governance system is characterized by long-term debt financing, concentrated block-holder ownership, weak shareholder rights, inactive markets for capital control and rigid labour markets [19].
\nCombination of the Continental European capitalism characterized by large controlling shareholders and elements of entrepreneurial or founders capitalism mostly associated with the USA is characteristic of new emerging capitalism not only in the transitions economies of Central and Eastern Europe but also in other parts of the world [26]. Many transition economies (i.e. former socialist countries) are characterized by a relatively high level of ownership concentration leading to the agency problems between majority and minority shareholders. Concentration of ownership in the hands of a few or even one block-holder assures a significant control and direct influence on the nomination and control of management team, which for this reason cannot be expected to be independent [26, 27].
\nA legal system and tradition also has important implications for corporate governance system [2]. According to institutional theory, legal rules and norms are important component of national institutional systems [5]. In terms of legal origins, common-law and non-common-law (i.e. civil-law) countries are distinguished [2], even though this corporate governance research stream has been criticized due to its simplistic theoretical and empirical grounds [5]. Non-common-law countries (such as Germany, Scandinavia and French countries) are countries with poorer investor protection, and have smaller and narrower capital (both equity and debt) markets and less widely held companies (more ownership concentration) than common-law countries (such as UK). Countries whose legal system is based on a tradition of common law afford more rights to shareholders and more protection to creditors than countries whose legal systems are based on civil law (or code law) [28].
\nIn common-law countries, there are mainly information asymmetry and agency problems between managers and (majority) shareholders; in non-common-law countries, these are mainly information asymmetry and agency problems between minority and majority shareholders. The research findings of Bauwhede and Willekens [29] showed that the level of corporate governance disclosure was significantly lower in non-common-law countries than in common-law countries due to the greater pressure that shareholders can put on managers in comparison to the pressure minority shareholders can put on majority shareholders.
\nSeveral authors [7, 8] identified as an important dilemma within the corporate governance field on whether to develop
Corporate governance codes ‘do encourage companies to implement stronger corporate governance structures and release more information in a timelier manner to market participants’ [8, p. 475]. According to Nowland [8, p. 477], the success of codes ‘relies on market mechanisms enticing or pressuring companies to improve their governance and disclosure practices’.
\nCorporate governance codes can be developed
When a firm introduces its own code, the main objective of such a code is ‘to establish, and to communicate to investors and other stakeholders, the governance principles adopted by the firm’ [10, p. 223]. In this case, a code applies only to that company. Transnational institutions such as the World Bank, the Organization for Economic Cooperation and Development (OECD) and the International Corporate Governance Network (ICGN) have also created governance codes. The introduction of such codes highlights their importance for prosperity of national economies and specific geographic regions. They are usually more general than a governance code established at the national or firm level [7, 10]. The issue of this type of codes started at the end of the 1990s (first such code was issued in 1996), and there were 14 transnational institutions that issued 21 corporate governance codes by the end of 2014 [10]. A majority of codes issued by transnational institutions are developed for listed companies. However, an increasing number of codes have been issued for non-listed companies, for special types of companies (e.g. state-owned and family ones) or for different types of financial institutions [10, 33]. Governance codes issued by transnational organizations are important for two reasons according to Aguilera and Cuervo-Cazurra [7]. Firstly, they emphasize the importance of good corporate governance and provide best governance practices across several countries. Secondly, they can provide basis for the creation of national governance codes. There is evidence that the creation of national governance codes usually accelerates after the issue of influential transnational codes and the occurrence of corporate scandals and frauds [10].
\nNational governance codes ‘tend to be adapted to the country’s economic environment and address the country’s most salient governance problems’ [31, p. 436]. The so-called domestic forces influencing the development of governance codes refer to demands from investors who prefer better protection of their interests. Codes are then introduced to improve governance practice and to close the perceived gap in the domestic national governance system and improve its efficiency. That is often in the cases when other governance mechanisms (e.g. takeover markets and legal environment) fail to protect adequately shareholders’ rights [31]. In some countries, corporate collapses and scandals triggered the issues or revisions of corporate governance codes. For example, in Cyprus, the Cyprus Stock Exchanges introduced the Cypriot Corporate Governance Code in 2002 as a response to the major stock exchange collapse [34].
\nSome evidence [7, 30, 35] demonstrate that governance codes can be viewed as mechanisms facilitating governance convergence across countries. Such convergence is the result of several external forces among which the most powerful are globalization, market liberalization and influential foreign investors [7, 30]. Namely, globalization, the internalization of markets and deregulation have led to rapid changes in traditionally grounded models of corporate governance [19]. These external forces ‘lead to pressure on national governments, institutions and companies, to conform to internationally accepted best practices of corporate governance at the international level’ [12, p. 54], thereby influencing the attractiveness of countries and companies for foreign investors. Countries that are more exposed to other national economic systems experience greater pressure to change governance practice not only to improve efficiency of domestic companies but also ‘to harmonize the national corporate governance system with international best practices’ [9, p. 4].
\nSeveral research findings on corporate governance codes revealed the governance convergence towards the Anglo-Saxon model (i.e. shareholder model) [30, 34, 35]. Governance codes, which are more in line with the Anglo-Saxon model, can be found not only in the established European economies [30] but also in emerging economies [34]. The explanation for this convergence may lay in the efforts of transnational organizations (e.g. the World Bank and the OECD) to promote those global standards of corporate governance that are more in line with Anglo-Saxon model [7]. The European Commission (EC) also encourages the convergence of governance practice in European countries by issuing recommendations in the area of corporate governance [7, 30, 32]. According to Cromme [30], the governance guidelines at the European level are highly aligned with the country codes. This can be due to the fact that certain governance issues (e.g. stakeholders rights and responsibilities) have been taken more seriously in countries of Continental Europe since ‘their former weak capital markets are strengthened and institutional investors become more assertive in promoting more effective governance measures such as higher accountability and better disclosure’ [7, p. 381]. Berglöf and Pajuste [26] claim that the introduction and the contents of governance codes of the Eastern European countries were the result of external pressure in terms of the EC corporate governance recommendations. The codes in these countries were largely determined by the demands that resulted from the EU accession process; many contents of the codes were also more or less copied from the UK and the USA codes. However, based on the research results on the comparison of the codes contents of the Eastern European countries, which are the EU member states, Hermes et al. [12] claim that domestic forces (e.g. the extent of enterprise restructuring, large-scale privatization and stock market development) in some of the analysed countries played an important role in shaping the codes’ content.
\nSeveral scholars [1, 2, 20, 25, 36] raised doubt about ‘one size fits all’ corporate governance regulations. It is highly unlikely that a single set of best practices exist for all companies since corporate governance is a very complex and dynamic system and not all mechanisms may work well in all governance contexts [2]. The corporate governance practices and regulations should reflect particularities of companies’ ownership and control structures that differ across countries and industries and determine the type and severity of agency costs [36].
\nThe codes’ voluntary nature is realized by the ‘comply or explain’ approach [7, 10] that is ‘an enforcement mechanism that allows companies to deviate from the code norms, but at the same time requires them to disclose these deviations’ [37, p. 255]. The basic idea of this approach is that a company has to disclose the compliance with recommendations of a particular code adopted by a company, or in the case of non-compliance, a company must explain the reasons for it [8]. The ‘comply or explain’ approach enables a company to adapt its governance practices to its particular circumstances [36], its size and shareholding structure [32, Article 7], to consider sectoral specifics [37], thereby allowing flexibility in choosing ‘which corporate governance structure to adopt to better pursue their objectives’ [10, p. 223]. Departing from the codes recommendations enables companies to govern themselves more effectively by adapting their corporate governance practice to their particularities [32, Article 7].
\nDifferences exist among countries regarding the implementation of this approach. There are two ways of implementing the ‘comply or explain’ approach and that are mandatory and voluntary one [10]. The mandatory disclosure on the adaptation of code’s recommendation or explanation of deviations is required by listing authorities (e.g. in Australia, Canada, Estonia, Luxemburg, Malta, Malaysia, Russia, Singapore and the UK) or by law (e.g. in several EU countries). The voluntary disclosure is present in some emerging economies (e.g. Algeria, Lebanon, Tunisia and Yemen). However, such lack of disclosure may decrease the effectiveness of governance codes since investors cannot understand ‘if the company does not adapt the best practices or adopts the best practices, but does not disclose their adoption’ [10, p. 224]. In the recent World Bank analysis [33] of corporate governance codes, 112 codes were found. Of the 112 codes, some 27 were purely voluntary with no link to regulatory frameworks, eight were mandatory and seven countries appeared to have some level of mandatory provisions. All other codes were variations of the ‘comply or explain’ approach.
\nThe ‘comply or explain’ mandatory disclosure requirement is implemented by most stock exchanges. Companies listed on the stock exchange must explain the reasons for non-compliance with the (country) governance code in their annual report [30, 31, 36]. By realizing mandatory ‘comply or explain’ approach, the code ‘helps companies exercise greater self-responsibility in their dealings with the capital market’ [30, p. 364] and ‘promotes culture of accountability, encouraging companies to reflect more on corporate governance arrangements’ [32, Article 7]. Luo and Salterio [36, p. 460] claim that the disciplining power of this approach ‘is the required public disclosure of governance practices that allows market participants to evaluate the effectiveness of the firm’s governance system and to make informed assessments of whether noncompliance is justified in particular circumstances’. Appropriate disclosure of non-compliance with the code recommendations and of the reasons for these is very important for ensuring that stakeholders can make informed decisions about companies and for reducing information asymmetry between companies’ management and shareholders, thus decreasing the monitoring costs [32, Article 17].
\nSeveral research findings demonstrate that listed companies tend to comply with codes recommendations [25, 36] which might be due ‘to the market forces and pressures to comply with legitimating practices or “doing the right thing”’ [31, p. 419]. Since the best governance practices are generally recognized as value enhancing, listed companies try to make clear explanation on why they do not comply with particular codes’ recommendations [25]. Empirical evidences revealed some other factors that influence the rate of compliance with the codes’ recommendations—see Ref. [10]. One of them is the firm size—larger companies require more sophisticated governance practices, their ownership structure is more dispersed and they are more under the control from the external environment (i.e. their greater visibility) [37]. Important factors are also the overall institutional environment, especially the legal norms and cultural values, and the development of national economy—the level of compliance with codes’ recommendations is higher in developed than in developing countries that lack a tradition of sound corporate governance—see Ref. [10].
\nEven though analysis indicate gradual improvement in the way companies in the EU member states apply corporate governance codes, shortcomings were identified in the application of the ‘comply or explain’ approach. There are critiques of this approach as being ineffective due to ‘the poor quality of explanations and because it provides a rather soft option, which proved in the financial crisis that it could not be trusted’ [33, p. 70]. There are also interesting observations and empirical evidences regarding the explanations for deviations from codes’ recommendations. In some European countries (e.g. UK, Netherlands and Germany), companies often use standard explanations for deviations, and often firms complying with the same recommendations use similar explanations for non-compliance. As the level of compliance increases over time, the quality of explanations for non-compliance remains very low showing only marginal improvements—see Ref. [10].
\nThe first code came into being in the late 1970s in the USA. That was a period of ‘transition from the conglomerate merger movement of the 1960s … to the empire-building behaviour by management through hostile takeovers … and to the shareholder rights movement of the late 1980s and early 1990s’ [31, p. 418]. The year 1992 presents an important landmark in the development of governance codes around the world. That year, the Cadbury Report and the Code of Best Practices were issued in the UK, and since then the number of countries issuing governance codes has been increasing [7]. The Cadbury Report was a result of several financial scandals in the UK in the 1980s and early 1990s. This was the first corporate governance code adopted by the London Stock Exchange. The Cadbury Report is recognized in the literature and in the governance practice as one of the most influential codes, and several dimensions of that code were introduced into corporate governance systems not only in the UK but also around the world, including the USA and Germany [11]. After the issue of the Cadbury Report, the diffusion of codes has been rather slow and accelerated after the issue of both the OECD Principles of Corporate Governance and the ICGN Statement on Global Corporate Governance Principles in 1999. There were only nine countries that issued a code by 1997, while a further 34 countries issued their first code by 2002 [10].
\nAnother important landmark in the diffusion of codes around the world presents the recent financial crisis (with beginnings in 2007–2008) and accompanying scandals that brought attention to the importance of introducing adequate governance mechanisms. The number of corporate governance codes has increased especially between 2009 and 2010 [10]. The recent analysis revealed that since the financial crisis codes have been and are being revised more often than before crisis. For example, the website of the European Corporate Governance Institute (ECGI) reported on 14 code revisions since 1 January 2015 [33].
\nThe research findings show that first countries that issue governance codes, that is, the USA as first, followed by Hong Kong, Ireland, the UK and Canada, were countries with a common law, or English-based, legal system [7]. This is a more flexible legal system in contrast to civil-law system since judicial precedent shapes the interpretation of laws and their application. In the civil-law system, judiciary must base its decisions on strict interpretation of the laws that are issued by legislative bodies [2, 28]. Three types of the civil-law system exist and that are French, Scandinavian and Germanic. Research findings of Aguilera and Cuervo-Cazurra [31] indicate that codes are more likely to be issued in countries with a common-law system. In authors’ opinion, there are two explanations for their research findings. Firstly, common-law countries, where strong shareholder rights are embedded in their legal system, are more likely to emphasize continuously good governance practice introduced by codes. Secondly, the common-law legal system’s characteristics facilitate the enforceability of the codes. Even though in the common-law countries the good governance practice ‘tend to reach the level of enforceability in courts, in civil-law system such practices do not have enforceability through the courts unless they become codified into law’ [31, p. 434]. This cognition is confirmed by the research results of Zattoni and Cuomo [9] which show that countries with civil-law system issue codes later than common-law countries, and create fewer codes that often comprise ambiguous recommendations. Their research results suggest that ‘the issuance of codes in civil-law countries is prompted more by legitimation reasons than by determination to dramatically improve the governance practices of national companies’ [9, p. 12].
\nAguilera and Cuervo-Cazurra [31] identified three exogenous pressures on the development of codes. The first pressure can be explained by the economic integration of a country in the world economy that positively influences the adoption of governance codes. The second pressure that is positively related to the code’s adoption is the processes of government liberalization in a particular country. The withdrawal of government presence in the economy creates a need to establish new governance system in the newly privatized companies. The third pressure refers to the presence of foreign institutional investors that positively influence the code’s adoption. Institutional investors search for companies with good governance practice since they need assurance for their investment to be protected.
\nImportant research findings on codes’ diffusion refer to the relationship between the development of capital markets and the number of governance codes. Countries with larger and deeper capital markets have more governance codes since ‘the need for good governance increases as the number of public firms grows because agency problems between disperse owners and managers, or between majority and minority shareholders emerge’ [7, p. 379]. Research findings show that developed countries issued more codes than developing countries that are more reluctant to revise their first code. Recent data show that 91 countries issued 345 codes by the end of 2014, of which 91 were first codes and 254 codes were revisions of previous codes. Developed European countries issued more than half of codes issued by all countries (174 out of 345), thereby playing a significant role in the diffusion of codes [10].
\nA majority of national codes are designed for listed companies. Recently, an increasing number of codes have been issued for specific types of companies (e.g. state-owned or family-owned), for different types of financial institutions (e.g. commercial banks, institutional investors and mutual funds) and for voluntary and charitable organizations [10].
\nThe total number of codes issued in European countries increased after the publication of two important reports and that are The European Union Action Plan on ‘Modernizing Company Law and Enhancing Corporate Governance in the EU’ published in 2003 and the report by the High-Level Group on Financial Supervision in the EU published in 2009. The aims of both reports were encouraging the convergence of company law and corporate governance practices within the EU [10].
\nIn the EU countries, governance codes are recognized to have a significant role in establishing principles of good corporate governance. Especially listed companies are required to include a corporate governance statement (CG Statement in their management report. In this statement, a company should disclose its corporate governance arrangement [Article 4(1) (14) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004]. Since the ‘comply or explain’ approach is the key principle in the EU governance system, a company is required to explain in its corporate governance statement the deviations from the code’s recommendations and the reasons for doing so [32, Article 4, 6]. A company is required to describe the alternative measure taken ‘to ensure that the company action remains consistent with the objectives of the recommendation, and of the code’ [32, Article 17]. In this respect, the EC emphasizes the required high quality of explanations on non-compliance reported by companies [32, Article 8, 11]. The EC recommendation on the quality of corporate governance reporting predominantly addresses listed companies. However, it suggests that other companies might also benefit by following the EC recommendation [32, Article 14].
\nIn Germany, a corporate governance code was found as being unnecessary until 2002 when the German Corporate Governance Code (GCGC) was adopted [30]. This code contains standards of good governance that represent internationally and nationally recognized best practice. German companies are not required to follow these standards with the exception of listed companies. Listed companies have to disclose the (non)-compliance with the GCGC recommendations [37]. The research study by Talaulicar and Werder [37] showed high degrees of compliance with the GCGC, especially among German-listed companies. The authors were also able to identify some recommendations (i.e. 24 recommendations) that many companies do not comply with. However, in authors’ opinion low rates of acceptance of these recommendations do not necessary imply that they need to be changed. On the contrary, such a situation may reflect ‘that firms take advantage of the flexibility the code grants and disregard certain code norms in order to address company-specific peculiarities’ [37, p. 268].
\nHermes et al. [12] conducted a research on codes adoption in seven Eastern European countries or the so-called transition economies (i.e. Czech Republic, Hungary, Lithuania, Poland, Romania, Slovak Republic and Slovenia) that were at the time of the research already the EU member states. Romania was one of the first countries that issued a code in 2000. Other countries such as Slovenia and Hungary followed a few years later and issued a code in 2004. Twelve Eastern European countries issued their own code by the early 2006: Czech Republic (2001, 2004), Poland (2002, 2004), Russia (2002), Slovak Republic (2002), Macedonia, Ukraine (2003), Lithuania (2004), Slovenia (2004, 2005), Hungary (2004), Latvia (2005) and Estonia (2006); some of these countries published the new version of the code in the following years [12]. Hermes et al. [12] conducted analysis of the contents of the governance codes that are based on the analysed seven transition countries on the ‘comply or explain’ principle. They focused their research on three areas and that were disclosure rules, strengthening shareholder rights and modernizing boards.
\nSince in many cases these codes were adopted as listing requirement for stock exchanges, this gave codes a formal and compulsory character. The research results show that the codes of the Eastern European countries on average cover only around half of the EC recommendations. For some of the countries included in the research (especially Romania, Hungary and Poland), domestic forces related to country-specific characteristics of corporate governance system influenced considerably the contents of corporate governance codes. Codes in other countries covered a majority or almost all the EC recommendations of the governance principles [12].
\nSeveral research findings show that the adoption of corporate governance codes considerably affects the level of disclosures. Sheridan et al. [11] found this in the case of the UK where the introduction of governance standards in terms of reports concerning best practice and codes of good corporate was accompanied by a significant increase in the number of news announcements. The research in eight East Asian (i.e. Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand) countries indicates that voluntary national codes had both direct and indirect effects on companies’ disclosure improvements. That is especially the case in those countries where codes have special sections designated to disclosure [8].
\nSlovenia is a new European state that was founded in 1991 and is nowadays one of the EU member states. Since the early 1990s, Slovenia like other Eastern European countries has made considerable efforts in transition to market economy [12, 26]. After its foundation, Slovenia has been faced with a three-way transition process [14]: (1) the transition to an independent state, (2) the reorientation from the former Yugoslav to Western-developed markets and (3) the transition to the market economy. These include several developments such as privatization of companies, trade liberalization, development of domestic financial markets and their integration to global capital markets, and development of the institutional framework in terms of regulations and law systems. All these developments have triggered the need to regulate the governance of companies in order to mitigate agency problems [12]. The transformation of companies’ ownership from social into private one was realized based on the law on ownership transformation that came into force in 1992. The first Companies Act was adopted in 1993. Since then, corporate governance has been regulated by a number of acts that have been amended and supplemented as response to changes in legislation, market conditions and cases of good governance practice [15].
\nCorporate governance codes present an important element of corporate governance regulations in Slovenia. The first governance code was introduced for public joint stock companies. The Slovenian corporate governance code for public companies (in continuation: the Slovenian CG Code) was the result of joint efforts of the Ljubljana Stock Exchange, the Managers’ Association of Slovenia and the Slovenian Directors’ Association in creating recommendations on the best governance practices. The Slovenian CG Code came into force in 2004. Since then, the code has been revised several times: in 2005, 2007, 2009 and the last revised version of the code came into force in January 2017 [38–41]. Not only listed companies can apply the Slovenian CG Code’s recommendations but also all those companies that would like to establish a transparent and understandable governance system [42].
\nFirst versions of the code included besides recommendations of the best governance practices also legal provisions on corporate governance. The Slovenian CG Code, which came into force in 2009, comprised only recommendations that are not legally binding (i.e. soft law). It is based on Slovenian legislation and incorporates ‘the guidelines and recommendations of the European Union, principles of business ethics, internal bylaws of the three institutions (authors comment: the Ljubljana Stock Exchange, the Managers’ Association of Slovenia, and the Slovenian Directors’ Association) and the internationally recommended standards of diligent and sound corporate governance’ [42, p. 2].
\nCompanies, which are listed on the Slovenian-regulated market, must disclose to which code they adhere, any deviations from the code and reasons for them in their corporate governance statement, thus realizing the ‘comply or explain’ principle [43]. Shareholders have a right to demand additional explanations from a management board regarding the content of the statement at the shareholders meeting [40, 46]. According to the LJSE Rules [44] and LJSE Guidelines [45], prime and standard market companies are requested to disclose (non)-compliance with the code in the Statement on Compliance with the code that is the part of the CG Statement. The CG Statement was introduced by the Slovenian Companies Act [46] in 2009 and must be published as a part of annual reports. It is recommended that listed companies published it separately on their website [45]. This is in line with Article 20(1) of Directive 2013/34/EU that requires listed companies to provide information of their corporate governance arrangements as well as how they applied the relevant corporate governance code recommendations. It is believed that such requests would improve transparency for shareholders, investors and other stakeholders [32]. From 2015, the CG Statement is obligatory not only for listed companies but also for those companies that are bound to auditing.
\nCompanies in Slovenia are relatively free in choosing a governance code to which they adhere. However, it is expected that companies listed on the prime and standard market of the Ljubljana Stock Exchange will largely follow the Slovenian CG Code [42, 47]. Companies can also create their own code, which might be a reasonable approach in the cases of adopting more codes. The selection of a code can also be influenced by the expectations or preferences of the company’s shareholders [40]. However, other codes are not the subject of this contribution.
\nSince several research studies discussed in the next section explored the adoption of the CG Code from 2009 as well as this code has been adopted in the practice of Slovenian companies longer than any other Slovenian code did, we explain in more detail the content of this code. The recommendations of the CG Code from 2009 [42] cover several broad areas of corporate governance and that are corporate governance framework, relations with shareholders, supervisory board, management board, independence and loyalty of members of supervisory board and management board, audit and system of internal controls, and transparency of operation.
\nthe management board together with supervisory board creates and adopts a Corporate Governance Policy (CG Policy);
with the CG Policy they lay down major corporate governance outlines that should be compliant with the long-term goals of a company [42].
a company should ensure such a corporate governance system that treats equally all shareholders as well as encourage a responsible enforcement of shareholder rights;
shareholders should be informed about the convening and progress of general meetings in a timely and accurate manner;
a company should provide shareholders with reliable data that enables them to make informed assessments of the items on the general meeting’s agenda [42].
the composition of the supervisory board should ensure responsible supervision and decision-making that are in the best interest of a company (i.e. re-members of the board should have professional expertise, experiences and skills);
the selection procedure of the board members should be transparent and well defined in advanced;
the board monitors a company, evaluates the work of the management board and actively cooperates in creating CG Policy;
members of the supervisory board sign a statement in which they disclose whether they meet the criteria of independence and the possession of relevant professional training and know-how required to act as the supervisory board member;
the president of the board is elected by simple majority;
members of the board should be adequately paid for their work;
the supervisory board sets us special committees dealing with special issues;
the supervisory board assesses its work and work of its committees once a year [42].
a company is managed by the management board that should ensure long-term performance by defining values and strategies;
the composition of the management board should ensure decision-making in the best interest of a company and functioning in compliance with high ethical standards considering the interests of diverse groups of stakeholders;
a remuneration system should enable composing of the managements board that best suits the needs of a company and ensures the alignment of the board’s and the company’s long-term interests [42].
members of both boards make independent decisions taking into consideration the goals of a company [42].
an auditor is appointed in order to ensure an independent and impartial audit of the company’s financial statements;
an efficient system of internal controls is set up that also ensures a quality-risk management; together with its auditing committee, a company ensures periodical and impartial professional surveillance of the system of internal controls [42].
a corporate communication strategy should be defined as a part of the CG Policy dictating high-quality standards in preparing and publishing accounting, financial and non-financial information;
informing both shareholders and public should be set up in a manner providing equal, timely and economical access to information related to all aspects of a company;
the company’s governance practice is presented in the CG Statement taking into consideration the Companies Act;
the Statement is a part of the annual report published as an independent document on the company’s website [42].
At the beginning of 2017, a new version of the CG Code was issued where the purpose remains the same. That is to provide corporate governance recommendations for joint stock companies that are listed on the Ljubljana Stock Exchange. Other companies may also follow the CG Code’s recommendations, thereby establishing transparent governance system in order to increase companies’ legitimation among different groups of stakeholders (i.e. domestic and international investors, employees, banks, public, etc.). There are three main reasons for renewal of the previous version of the CG Code [48]:
\nThe regulatory framework has changed in the last 7 years. Several changes in legislation, especially in the area of corporate governance, reporting and public disclosure on governance system of a company came into force.
Several changes in international and domestic recommended governance practice also importantly influenced a decision to renew the CG Code from 2009. In 2015, the OECD adopted new principles of corporate governance. Consequently, several countries have issued new codes (e.g. Austria, Finland, Germany, Denmark, Sweden, UK, Romania and Baltic countries). At the same time, advanced recommended governance practice has been developed in Slovenia (e.g. corporate governance codes for non-public companies in 2016, recommendation for auditing committee in 2016, practical advices for quality explanations in Statement on Compliance in 2015, etc.). The EC recommendations on the quality reporting on governance issued in 2014, which propose the EU members to monitor the codes’ compliances, also importantly influence the development of the new CG Code in Slovenia.
The results of the latest analysis of disclosures of compliances with the Slovenian CG Code from 2009 for the 2011–2014 periods (which are in more detail discussed in the next section) were also one of the reasons for introducing changes in the corporate governance recommendations of the CG Code. The analysis revealed those recommendations that the majority of companies complied with and which recommendations were among those that companies reported on non-compliances. The analysis and the issuers of the CG Code tried to improve those recommendations that were recognized as being described not clear enough, and therefore their introduction in the company’s governance practice caused unnecessary problems.
Therefore, several changes were introduced in the new CG Code. We present the major changes by organizing them according to the major areas of the Slovenian CG Code from 2017 [48, 49]:
\nEven though research studies on the adoption of governance codes in the corporate governance practice in Slovenia are scarce, the existent research results provide an important insight into the development of governance practice in Slovenia and the role of the corporate governance codes in this process. In this section, we analyse the findings of the previous research studies on governance codes in Slovenia. The structured content analysis was done chronically, starting with the research that explored the earlier version of the CG Code from 2005 and continuing with the research studies on the CG Code from 2009. The research conducted by the Ljubljana Stock Exchange together with the Slovenian Director’s Association in 2015 [50] provides the most comprehensive insight into dynamics of the corporate governance codes’ adoption and implementation of ‘comply or explain’ principle in Slovenian companies. Other research studies gave only partial and often static view in the role of governance codes in the practice of Slovene companies. The main research findings are presented in Table 1.
\nAuthors/source | \nThe scope/subject of analysis | \nSample | \nCode under investigation | \nMain findings | \n
---|---|---|---|---|
Research conducted by Hermes et al. [12] | \nComparison of the codes’ contents with the EU recommendations on disclosure rules, strengthening shareholders rights, modernizing boards. | \nSeven Eastern European countries, also the EU member states: Czech Republic, Poland, Russia, Slovak Republic, Russia, Macedonia, Ukraine, Lithuania, Slovenia, Hungary, Latvia and Estonia. | \nSlovenian CG Code 2005 | \nMain findings:
| \n
Ljubljana Stock Exchange with the support of the Slovenian Director’s Association [40] | \nDisclosures of (non)-compliance with the Slovenian CG Code 2009 for 2010 and 2011. | \nTen companies listed on the prime market of the Ljubljana Stock Exchange. | \nSlovenian CG Code 2009 | \n\n
| \n
Ljubljana Stock Exchange together with the Slovenian Director’s Association [50] | \nDisclosures of (non)-compliance with the Slovenian CG Code 2009 for 2011–2014. | \nCompanies listed on the Ljubljana Stock Exchange: 58 companies for 2011 and 2013, 57 companies for 2012, and 60 companies for 2014. | \nSlovenian CG Code 2009 | \n\n
| \n
The SEECGAN Index [38, 39] | \nThe adoption of codes in the listed companies in Slovenia was explored by the following questions as a part of the SEECGAN Index methodology:
| \nAll prime and standard market that were listed on the Ljubljana Stock Exchange in June 2014; in total 22 companies. | \nAny corporate governance code. | \n\n
| \n
Scope (subject) of analysis and major findings of the research on corporate governance codes in Slovenia.
The Slovenian CG Code that came into force in 2005 (i.e. the revised version of the first code) was included in the
The comparison of the Slovenian CG Code with respect to the EU recommendations on enhancing corporate governance disclosure showed that the Slovenian CG Code included five out of nine analysed recommendations. Those recommendations that were not included in the code were those not addressed in the codes of the majority of other six analysed countries as well. Research findings showed that ‘openness from shareholders in general and from institutional investors in particular, with respect to their holdings and policies as major owners of companies’ [12, p. 65] were not recommended by the analysed codes. The results can be explained by the corporate governance systems in these countries where important features are controlling shareholders and block-holdings. According to Berglöf and Pajuste [26], companies with controlling shareholders are less prone to disclose information.
\nThe comparison of the Slovenian CG Code with respect to the EU recommendations on strengthening shareholder’s rights shows that the Slovenian CG Code included two out of three analysed recommendations. Those were the recommendation dealing with providing shareholders information for evaluation of a company’s performance and operations (not included only in the Romanian code), and the recommendation on shareholder democracy (i.e. the one share-one vote democracy). The last recommendation was found only in Slovenia and Lithuania [12].
\nRegarding the EU recommendations on modernizing the boards of directors, the Slovenian CG Code included four out of six analysed recommendations. Recommendations not included in the code were the recommendation on disclosure of the remuneration policy (included in three analysed codes) and the recommendation on prior approval by the shareholder meeting of share and share option schemes in which directors participate (included in four analysed codes). The Slovenian CG Code was the only code of the analysed ones that included the recommendation on the recognition in the annual accounts of the costs of share and share option schemes of directors [12]. These findings indicate that the Slovenian CG Code from 2005 already included recommendations not only on disclosure of fixed and variable remuneration of individual directors but also on disclosure of more sensitive information on how option and share schemes are constructed and how much that costs a company. These results indicate that the Slovenian CG Code introduced at that time many of the best governance practices at least in listed joint stock companies in Slovenia.
\nThe major findings of the analysis were that both the level of compliances with the best corporate governance practices and the quality of explanations of deviations from the CG Code’s recommendations have increased in the observed period [40].
\nThe results of the analysis indicated that two companies in 2011 and one company in 2010 complied with all code’s recommendations. The rest of the analysed companies disclosed on average a compliance with 81% of the code’s recommendations. More than half of total 112 code’s recommendations were identified as those that all analysed companies complied with. The comparisons for the observed 2-year period show that the level of compliance with the CG Code from 2009 has been improving [40]. Such results suggested that companies have been trying to consider the CG Code’s recommendations as much as possible, thereby also raising the quality of their governance practice.
\nThe analysed listed companies disclosed deviations especially from the following six recommendations of the Slovenian CG Code from 2009 [40]:
\ndefinition of goals in the company’s statute,
use of information technology to inform and conduct sessions of a supervisory board in a safe way,
self-evaluation of the supervisory board composition, functioning, conflict of interests, cooperation with the management board and its committees once per year,
the principle regarding payments of the supervisory board members that are determined at the shareholder meeting,
appointment of an audit committee and a remuneration committee and a nomination committee as soon as possible after the constitutive meeting of a supervisory board,
disclosure of payments of the members of a management board and a supervisory board.
Effectiveness of the CG Code in practice depends also on the transparency of deviations that should be reliable and complete. The detailed analysis of explanations of deviations shows that only 27% in 2010 and 44% in 2011 were such that could be classified as specific, high-quality explanations on deviations describing besides deviations also alternative governance practice and reasons for its adoption by a company [40].
\nEven though the quality of explanations of deviations has increased in the observed period, the comparisons of the reported disclosures and the actual governance practices raised an important question of the quality, completeness and credibility of these disclosures. The research results revealed that companies did not disclose all deviations mainly for two reasons. Firstly, companies did not interpret a particular recommendation correctly, and secondly, companies did not find a particular recommendation as relevant [40].
\nThe Ljubljana Stock Exchange together with the Slovenian Director’s Association conducted
The first step in the analysis was to explore the adoption of the Slovenian CG Code from 2009 in the analysed companies. The results show that the share of companies adopting the Slovenian CG Code from 2009 has increased from 63.8% in 2011 to 71.7% in 2014. The analysis reveals that even though the law enables companies to select any publicly accessed corporate governance codes, only one company decided on such solution. Reasons for not adopting the Slovenian CG Code are diverse and are mainly due to the fact that companies [50]
\nneither disclosed the code in their annual report nor published the CG Statement,
referred to legislative and other regulations, internal rules and/or their Corporate Governance Policy,
developed their own governance practice without adopting any official code,
companies’ shares were not traded at the market,
referred to invalid CG Code (e.g. from 2007), and so on.
Results of the analysis on the compliance with the Slovenian CG Code show that only few companies comply with all 112 recommendations. Those were three companies in 2011, two companies in 2012, three companies in 2013 and four companies in 2014. Companies complied on average with 89.8% of recommendations in 2011, 90.6% of recommendations in 2012, 89.9% of recommendations in 2013 and 89.8% of recommendations in 2014. Only 22 recommendations (19.6%) were found that all analysed companies complied with in the observed period [50]. The percentage is lower than in the 2012 analysis, but we should take into consideration that in 2012 analysis only primer market companies were explored that are expected to adhere to the majority of the code’s recommendation.
\nAs stated in the report of the analysis [50], the number of companies complying with all code’s recommendations is still low. However, this does not necessarily indicate lower quality of companies’ governance practice. The main purpose of the analysis of compliance with the code’s recommendations is not to ensure compliance with all recommendations if that is not an optimal solution for a company. If deviations are explained and alternative solutions are presented, such non-compliance indicates that a company has developed an alternative practice that best suits its specifics. Therefore, in-depth analysis of explanations was conducted. The findings demonstrate that the share of specific, high-quality explanations of deviations that described both deviations and alternative solutions has increased. The share of such high-quality explanations was 23.5% in 2011 and 27.8% in 2014 [50]. Even though the results suggest that companies have becoming aware of the importance of good disclosure practices, the quality of disclosures on deviations still needs to be improved. Contrary to the 2012 analysis, this analysis did not include investigation on whether companies really disclosed all deviations.
\nThe results of the analysis also provide a comprehensive insight into those recommendations that companies did not comply with. The list of the most frequently disclosed deviations is organized per main areas of the CG Code accompanied with the data on the share of companies that disclosed deviations from a particular recommendation [50]:
\nA closer look at the results shows that the share of companies disclosing deviations from particular recommendations has increased in the observed period. Half of the statistically most frequent deviations were those from the recommendations on the transparency.
\nAnother research on corporate governance codes in Slovenia was conducted as a part of research on measuring the corporate governance quality by applying
Structure and Governance of Boards,
Transparency and Disclosure of Information,
Shareholders’ Rights,
Corporate Social Responsibility,
Audit and Internal Control,
Corporate Risk Management and
Compensation/Remuneration.
All companies of the prime and standard market, in total 22 companies, that were listed on the Ljubljana Stock Exchange in June 2014 were explored. The main source of data was annual reports for the year 2013. Additionally, reports and documents published on the companies’ websites were analysed. Research results revealed that more than three-quarter of the prime and the standard market companies disclosed a code. The majority of companies referred to one of the official codes. All standard market companies and 88.9% of the prime market companies disclosed the compliance with the corporate governance code and explained the deviations from it. Even though the disclosure of compliance with the chosen code is obligatory for the prime and the standard market companies in Slovenia [45, 46], one of the prime market companies did not disclose compliance with the code [39].
\nGood corporate governance is primarily the responsibility of every company and regulations at the national level taking into consideration specifics of the national economy, and the latest developments of governance practices and regulations at the European or even global level should ensure that certain governance standards are respected. Therefore, it is important that both hard law and soft law (i.e. especially corporate governance codes) provide comprehensive corporate governance framework, thereby encouraging the introduction of high governance standards and best practices in the companies’ corporate governance system. This is of key importance for performance, growth and long-term sustainability of companies.
\nThe findings of research studies and analyses discussed in this contribution show that the Slovenian CG Code has been playing an important role in developing corporate governance practice in Slovenia. Especially this is true for Slovenian-listed companies supporting cognitions by Aguilera and Cuervo-Cazurra [31] about the issuer’s ability to enforce changes in the companies’ governance system. Codes that are developed by the stock markets have strongest enforceability, since they are designed as the norm of operation, and thus having a greater impact on the promotion of good governance. The CG Code itself as well as mandatory disclosure of compliance with the code’s recommendations serves as a guideline to different groups of stakeholders by clearly describing the particularities of the Slovene business world. Disclosures in the CG Statement based on ‘comply or explain’ approach should be specific and of high quality so that shareholders, investors and other stakeholders get a transparent and a reliable picture of the company’s governance system.
\nThe LJSE analyses from 2012 and 2015 of disclosures of compliances with the Slovenian CG Code [40, 50] show that the number of specific, high-quality explanations of deviations describing besides deviations also alternative solutions has increased. Even though these results indicate that companies have become aware of the importance of good disclosure practices, their share is still relatively low and therefore improvements are needed in this respect. Such situation is not specific for Slovenia, but has been noticed in other European countries where companies often use standard explanations of deviations, see [10]. The ‘comply or explain’ approach is effective only when high-quality explanations of deviations are disclosed. That is a way we find of crucial importance to raise awareness of the companies’ key stakeholders on the main features of the high-quality explanations. According to the EC Recommendations, the high-quality explanations of deviations mean [32, Article 18]
\navoiding the use of the standardized language,
focusing on the specific company context explaining the departure from a recommendation and
the explanations should be structured and presented in such a way that they can be easily understood and used.
EC recommends companies [32; Section III, paragraph 8, 33; Section III, paragraph 8] to clearly state which specific recommendations they do not comply with and for each deviation, they should
\nexplain in what manner the company has departed from a recommendation;
describe the reasons for the departure;
describe how the decision to depart from the recommendation was taken within the company;
where the departure is limited in time, explain when the company envisages complying with a particular recommendation;
where applicable, describe the measure taken instead of compliance and explain how that measure achieves the underlying objective of the specific recommendation or of the code as a whole, or clarify how it contributes to good corporate governance of the company.
The research findings show that the level of compliance with the codes’ recommendations has been increasing in Slovenia. However, as stated in both reports [40, 50], we cannot make a firm conclusion on the actual level of compliance with the CG Code’s recommendations. Companies may not disclose all deviations or may find them as unimportant in their attempt to disclose compliance with as many recommendations as possible. That is a way companies should be made aware of the main purpose of the corporate governance code and accompanying ‘comply or explain’ approach since ‘departing from a provision in the code could in some cases allow a company to govern itself more effectively’ [32, p. 44]. A non-compliance with the ‘best practice’ which is accompanying with an explanation of how the alternative approach achieves the goal of the non-adopted recommendation can present significant benefit when creating the governance system that best suits the company’s specific circumstances, see [36]. Companies should be aware of the flexibility enabled by the ‘comply or explain’ approach, and develop a governance system that in the best possible way addresses the company’s specifics. The practice of not disclosing all deviations could be a very dangerous one since it can raise doubt about the implementations of the rest recommendations for which a company disclose compliance, see [40].
\nBoth analyses on disclosures of compliances with the CG Code [40, 50] provide important cognitions on the adoption of the CG Code in Slovenian companies. Findings of such analyses reveal improvements in the governance practice and indicate those areas where changes are required. That is a way such monitoring and analysis should be done on the regular basis. Since we can observe high concentrated ownership in Slovenia [50] and companies with controlling shareholders are found to be less prone to disclose information [26], a regular monitoring of disclosures is of great importance. The EC recommends that public or specialized bodies should regularly monitor corporate governance statements published by companies in order to make ‘comply or explain’ approach effective [32, Article 19]. Shareholders should also perform effective monitoring in order to encourage good-quality explanations [32, Article 20]. Shareholders should play an active role in improving the quality of explanations in Slovenia as well. A dialogue between shareholders, a management board and a supervisory board is of great importance in the process of creating a suitable governance system. External institutions as professionals in monitoring the quality of disclosures [40] cannot do this. However, such professionals can play an important role in the process of monitoring due to knowledge and expertise they possess.
\nReporting on the monitoring results can considerably contribute to better understanding of the code’s recommendations among companies, promote debate and thus foster awareness of the underlying issues, see [26]. Regular monitoring of the codes adoption can provide legislators, policy makers and stock exchanges with an important insight into the effectiveness and efficiency of the codes, thus providing basis for developing and updating the recommendations ‘in order to address the potential failures of corporate governance mechanisms’ [10, p. 222]. Such monitoring can be the opportunity for regulators to ‘make the rules less ambiguous’ [26, p. 196] as it is the case with the last revision of the Slovenian CG Code that considered the findings of analysis of disclosures of compliances with the Slovenian CG Code from 2009 for the 2011–2014 periods.
\nThe research studies and analysis not only in Slovenia but also in other surroundings deal mainly with the disclosures of compliance with the codes’ recommendation. However, we believe that future research should address not only the statements on (non)-compliances but also how companies implement and practice the code’s recommendations. Effective governance is demonstrated by the implementation of the regulations and recommendation in the practice and ‘whether a code really contributes to improving practices depends on the extent to which companies actually comply with the recommendations in the code and to what extent compliances leads to changes in corporate behaviour’ [12, p. 63]. We believe that a more in-depth analysis of the declared and implemented governance arrangements and their consequences is needed. An important contribution in this direction can be the SEECGAN Index that enables to measure how the codes’ recommendations and national regulations contribute to the quality of corporate governance practice. The SEECGAN Index enables the comparisons of governance practices among South Eastern European countries, thereby creating a platform for debate about the best governance practices considering the specifics on national economies in that part of Europe.
\nFuture research should also address the relationship among the code’s compliance and the company’s performance in general as well as in Slovenia. None of the researches and analyses conducted in Slovenia have addressed this question yet. We find this issue to be of great importance especially since mixed results about the impact of the level of compliance with the code’s recommendations on companies’ performance can be found in the literature, see [10]. Some research studies even showed that financial performance could justify non-compliance [7]. Diverse and mixed results can be explained by cognitions of several authors that corporate governance is a complex construct influenced by many factors, see [37]. Both the research and the practice regulated by different forms of hard and soft laws should adequately address the complexity of corporate governance construct. We hope that findings presented in this paper contribute to better understanding on how the codes of good governance as a form of soft law address this complexity and where improvements are required.
\nThe author acknowledges the financial support from the Slovenian Research Agency (research core funding No. P5-0023).
\nMammalian spermatogenesis is a cell-organized differentiation process of male germ cells in the testis. This process includes spermatogonium mitosis, spermatocyte meiosis, and spermatid morphogenesis. Throughout spermatogenesis, Sertoli cells tightly embrace differentiating germ cells in the seminiferous epithelium and create a microenvironment essential for germ cell differentiation. In addition to physical support, Sertoli cells provide nutrition for developing germ cells and take up apoptotic components. During spermatogenesis, most of male germ cells undergo apoptosis, and those that finalize differentiation process will shed their most cytoplasmic components as residual bodies (RB). Apoptotic germ cells (AGC) and RB must be timely eliminated by Sertoli cells via phagocytosis.
The phagocytic elimination of AGC and RB by Sertoli cells has been proposed to contribute to spermatogenesis in several ways: (1) reducing space competition for enormous male germ cells to finalize differentiation process, (2) preventing noxious cellular contents that may be released by necrosis of apoptotic germ cells, (3) removing autoantigens that may induce an autoimmune response, and (4) recycling of AGC and RB as an energy source for Sertoli cells.
Various mechanisms are involved in the regulation of Sertoli cell phagocytosis of AGC and RB. The interaction of class B scavenger receptor type I (SR-BI) expressed on phagocytes and phosphatidylserine (PS) exposed on apoptotic cell surfaces is a universal mechanism by which phagocytes engulf apoptotic cells [1]. This mechanism is also involved in the regulation of the phagocytosis of AGC and RB by Sertoli cells [2]. Tyro3, Axl, and Mer (TAM) tyrosine kinase receptors and their functional common ligand, growth arrest specific gene 6 (Gas6), are also essential for optimal phagocytosis of AGC by Sertoli cells. Several other genes that regulate Sertoli cell phagocytosis of AGC have been recognized. The mechanisms underlying phagocytic removal of AGC by Sertoli cells are the main focus of this article.
Impairment of Sertoli cell phagocytosis is associated with pathogenesis and dysfunction of the testis, thus impairing male fertility. The inhibition of Sertoli cell phagocytic ability disrupts spermatogenesis [3]. Gene mutation that impairs Sertoli cell phagocytosis may lead to autoimmune orchitis and male infertility [4]. The pathogenic conditions due to impaired Sertoli cell phagocytosis are mentioned in the text.
The mammalian testis consists of two distinct compartments: the seminiferous tubules and the interstitial spaces among the tubules (Figure 1). The two major functions of the testis include spermatogenesis, occurring within the seminiferous epithelium, and steroidogenesis by Leydig cells that are in the interstitial spaces.
Human testicular schematic of histological structure and cellular constituents. The testis consists of two separate regions, namely, seminiferous tubules and interstitial spaces (left panels). The seminiferous tubules are composed of multiple layers of peritubular myoid cells (PMC) that constitute a tubular wall and Sertoli cells embracing different stages of male germ cells to form the seminiferous epithelium where spermatogenesis is fulfilled (right upper panel). The seminiferous epithelium is divided into two compartments, namely, the basal compartments and adluminal compartments, by the BTB that is formed by various junctions (right low panel) between two adjacent Sertoli cells, near the basal side. Different stages of developing germ cells, including spermatogonia (Sg), primary spermatocytes (PSc), secondary spermatocytes (SSc), round spermatids (RS), and elongated spermatids (ES), are localized on the seminiferous epithelium from the basal compartments to adluminal compartments. The interstitial spaces are composed of various cell types, the majority of which are Leydig cells (LC), but also macrophages (Mφ), as well as minor dendritic cells (DC) and T lymphocytes (T).
The seminiferous tubules possess a special microenvironment essential for spermatogenesis, which is composed of columnar Sertoli cells tightly encompassing developing germ cells. The blood-testis barrier (BTB) that is formed by two adjacent Sertoli cells near the basal side of the tubules is critical for maintaining the tissue homeostasis and immune microenvironment for normal germ cell development. During spermatogenesis, more than 75% germ cells have been estimated to undergo apoptosis [5, 6]. Apoptosis can occur at any stage of germ cells. Male germ cell survival and apoptosis are highly regulated by endocrine hormones [7]. In particular, follicle-stimulating hormone (FSH) produced by the pituitary and testosterone synthesized in Leydig cells is essential for healthy spermatogenesis. Low level of FSH increases germ cell apoptosis. The administration of testosterone in vivo inhibits germ cell apoptosis. Both FSH and testosterone could not act on germ cells because these cells do not express the receptors of two hormones. By contrast, FSH and testosterone can regulate the functions of Sertoli cells that express the hormonal receptors. Therefore, FSH and testosterone indirectly regulate germ cell apoptosis via Sertoli cells. The cascade of caspase activation is involved in the initiation of germ cell apoptosis [8]. Caspase 2 activation initiates the caspase cascade, in which BAX is involved in the cleavage of caspases.
Like other apoptotic cells, the translocation of phosphatidylserine (PS) to the surface of the cellular membrane is a characterization of male germ cell apoptosis [9]. The PS on the surface of apoptotic cells can be recognized by SR-BI and engulfed by phagocytes. At the final stage of germ cell development, most of the cytoplasm portions of spermatozoa are shed as RB before spermatozoa release to the lumen of the seminiferous tubules. However, immunohistochemical staining only detects a limited number of AGC. The RB are also rarely observed by histological analysis. These phenomena are assumed due to the rapid removal of apoptotic cells and RB through phagocytosis, a common way for engulfing apoptotic cells [1]. In accordance with this speculation, the inhibition of Sertoli cell phagocytosis in vivo greatly increases AGC numbers within the seminiferous tubules [3].
Phagocytosis of AGC and RB by Sertoli cells can be assessed by various approaches [10]. Confocal and transmission electron microscopy are reliable approaches that can distinguish apoptotic components ingested by Sertoli cells. However, these expensive and time-consuming approaches are not suitable for routine tests. Several simplified protocols to indirectly measure Sertoli cell phagocytosis have been reported [11, 12, 13]. These protocols require further optimization to avoid data misinterpretation. Lipid droplets are cyclically formed in the cytoplasm of Sertoli cells, which coincides with the spermatogenic cycle [14]. Therefore, it has been proposed that lipid droplets in Sertoli cells might result from the degradation of apoptotic components, including RB and AGC. An in vitro study confirmed that phagocytosis of AGC by Sertoli cells resulted in lipid droplet formation in Sertoli cells, which was used for evaluation of phagocytosis of AGC by Sertoli cells [13].
SR-BI is a receptor for high-density lipoprotein and can bind to acidic liposomes and apoptotic cells [15, 16, 17]. PS is a type of phospholipid that is located on the inner leaflet of the plasma membrane bilayer of healthy cells [18]. However, PS translocates to the outer leaflet of the cellular membrane during cell apoptosis and is exposed on the surface of apoptotic cells [9]. PS on the apoptotic cell surface can be recognized and bound by SR-BI on phagocytes, which is a key mechanism by which phagocytes engulf apoptotic cells (Figure 2). The interaction of PS and SR-BI induces cytoskeletal changes that form phagocytic cup, thereby resulting in the engulfment of apoptotic cells. As shown in Figure 3 (right side), SR-BI is expressed in Sertoli cells, and PS is exposed on the surfaces of AGC and RB [19, 20, 21]. Several in vitro studies provide evidence that Sertoli cells engulf AGC and RB through the interaction of SR-BI and PS. The phagocytosis of AGC and RB by Sertoli cells can be inhibited by the presence of annexin V that specifically binds to PS on the surfaces of AGC and RB [3, 21]. Moreover, an antibody against SR-BI disables the phagocytosis of AGC by Sertoli cells [19]. The SR-BI/PS-mediated phagocytosis of AGC and RB by Sertoli cells is confirmed in vivo, in which injection of anti-SR-BI antibody and annexin V into the seminiferous tubules increases the number of AGC [3]. Therefore, both in vitro and in vivo studies confirm that Sertoli cells recognize and engulf AGC and RB in the SR-BI/PS-dependent fusion.
SR-BI/PS-mediated phagocytosis. PS is translocated from the inner leaflet to outer leaflet of cellular membrane during apoptosis. PS is recognized by SR-BI located on the surface of phagocytes, and subsequently apoptotic cell is engulfed by phagocytosis via cytoskeletal changes.
Mechanisms and consequences of Sertoli cell phagocytosis of apoptotic germ cells (AGC) and residual bodies (RB). AGC and RB are phagocytized by Sertoli cells through two mechanisms (right side). SR-BI expressed on the Sertoli cell membrane binds with phosphatidylserine (PS) located on the surfaces of AGC and RB, thereby engulfing AGC and RB. TAM receptors mediate the phagocytosis of AGC and RB by Sertoli cells through Gas6 that bridges TAM receptors on Sertoli cell membrane and PS on the surfaces of AGC and RB. After phagocytosis, AGC and RB fuse with lysosomes and are recycled as energy sources for ATP production. If AGC and RB are not efficiently engulfed by Sertoli cells (left side), AGC and RB break down and release damage-associated molecular patterns (DAMPs). DAMPs can be recognized by toll-like receptors (TLRs) and initiate innate immune responses through TRIF and MyD88 signaling pathways. These pathways activate nuclear factor kappa B (NF-κB), mitosis antigen protein kinases (MAPKs), and interferon regulatory factors (IRFs), thereby inducing the expression of inflammatory cytokines, including TNF-α, IL-1, IL-6, INF-α, and IFN-β.
TAM receptors belong to a subfamily of the transmembrane receptor tyrosine kinases (Figure 4), which include three members, Tyro3, Axl, and Mer [22]. Gas6 is a functional common ligand of TAM receptors [23]. The TAM/Gas6 system regulates cell survival, innate immune response, and phagocytosis of apoptotic cells [24, 25, 26, 27]. TAM receptors are involved in several pathological conditions, such as chronic inflammatory and autoimmune diseases [28, 29], viral infection [30, 31, 32], and cancer [33, 34, 35]. Notably, TAM receptors are essential for spermatogenesis and male fertility [36, 37].
TAM receptors and Gas6 system. TAM receptors belong to transmembrane proteins. The extracellular N-terminal region of TAM receptors binds to C-terminal domain of Gas6. The binding of Gas6 to TAM receptors results in the activation of intracellular tyrosine kinase (TK) domain of TAM receptors, thereby promoting
The mechanisms by which the TAM/Gas6 system regulates testicular functions have been intensively investigated [38]. TAM receptors and Gas6 are abundantly expressed in Sertoli and Leydig cells [39]. All three Tyro3, Axl, and Mer receptors are expressed in Sertoli cells, whereas Leydig cells express Axl and Mer. Gas6 is uniquely expressed in Leydig cells. TAM receptors negatively regulate the expression of pro-inflammatory cytokines in both Sertoli and Leydig cells [40, 41], which might contribute to the immunoprivileged status of the testis [42]. In particular, the TAM receptors and Gas6 are essential for the phagocytic removal of AGC by Sertoli cells [43]. TAM receptors cooperatively regulate Sertoli cell phagocytosis of AGC. All three Tyro3, Axl, and Mer receptors participate in recognizing and binding AGC to Sertoli cells, whereas Mer is responsible for triggering phagocytic intracellular signaling that promotes engulfment of AGC. Any individual TAM receptors in Sertoli cells exhibit similar binding ability to AGC. However, Sertoli cells lacking all three TAM receptors remarkably decrease the binding between Sertoli cells and AGC. The TAM-mediated binding of Sertoli cells to AGC cannot be homologous adhesion because germ cells do not express any TAM receptors. Gas6 is required for TAM-mediated phagocytosis of AGC by Sertoli cells. The N-terminal region of Gas6 binds to PS on the surface of AGC, and the C-terminal of Gas6 is recognized by TAM receptors, allowing Gas6 to bridge the binding between Sertoli cells and AGC (Figure 3, right side). Gas6 also plays a role in mediating Sertoli cell phagocytosis of AGC through the activation of Mer, thus triggering intracellular phagocytic signaling that modulates the cytoskeleton of Sertoli cells for engulfing AGC.
Sertoli cells abundantly express dynamin 2, and dynamin 2 is involved in the regulation of Sertoli cell phagocytosis [12]. Dynamin 2 regulates the actin assembly in Sertoli cells during phagocytosis. A dynamin 2 inhibitor reduces Sertoli cell phagocytosis through the impairment of phagocytic cup formation. Knockdown of dynamin 2 perturbs actin polymerization and recruitment to target liposomes. The role of dynamin 2 in regulating Sertoli cell phagocytosis requires the interaction between dynamin and amphiphysin 1 [44]. Dynamin 2 and amphiphysin 1 can be specifically bound and simultaneously accumulated at ruffles of phagocytic cups. The interaction of dynamin 2 and amphiphysin 1 depends on the PS exposure on AGC.
Dimeric transferrin inhibits phagocytosis of RB by Sertoli cells in an autocrine manner [45]. Transferrin is a glycoprotein that transports iron and is highly expressed in Sertoli cells. Iron is essential for the inhibitory effect of transferrin on Sertoli cell phagocytosis. Transferrin can be physiologically secreted by Sertoli cells and inhibits the phagocytic removal of RB in autocrine manner.
ELMO1 is an evolutionarily conserved engulfment protein that mediates the internalization of apoptotic cells. However, ELMO1-deficient mice are viable and largely normal except for evident testicular pathology [46]. The seminiferous epithelium is disrupted, and AGC number is increased in the testis of ELMO1-deficient mice, therefore reducing sperm output. ELMO1 mediates the phagocytic removal of AGC by Sertoli cells. The engulfment receptors BAL1 and RAC1 (upstream and downstream of ELMO1, respectively) are involved in ELMO1-mediated Sertoli cell phagocytosis of AGC.
Noncoding miRNA regulates Sertoli cell phagocytosis. An early study showed that Dicer, a key enzyme that processes miRNA precursors into its functional form, is required for Sertoli cell function [47]. Dicer knockout mice are fetal lethal. The conditional Dicer knockout in Sertoli cells remarkably increases AGC numbers and leads to primary infertility, suggesting that miRNAs are involved in Sertoli cell function and spermatogenesis in mice. Whether phagocytic ability of Sertoli cells is impaired by Dicer mutation remains unclear. However, the miR-471-5p has been recently identified to regulate phagocytosis of AGC by Sertoli cells [48]. The overexpression of miR-471-5p in Sertoli cells increases AGC number due to a defective phagocytic ability of Sertoli cells in transgenic mice. The role of miR-471-5p in regulating Sertoli cell phagocytosis requires its interaction with the autophagy protein LC3. Interestingly, androgen favors Sertoli cell phagocytosis by regulating the expression of miR-471-5p and its target proteins.
The sperm production and testosterone synthesis are two major functions of testis. To fulfill these functions, the testis is highly organized, considering its anatomical location, histological structure, and cellular compositions. The testis is constituted by several types of tissue-specific cells. In addition to numerous germ cells, major testicular somatic cell types, including Leydig and Sertoli cells, are crucial for spermatogenesis. Leydig cells, localizing in the interstitial spaces of the testis, synthesize testosterone essential for spermatogenesis and multiple other extratesticular target organs. Sertoli cells embrace developing germ cells and constitute the seminiferous epithelium within the seminiferous tubules where spermatogenesis occurs (Figure 1). Sertoli cells are the only type of somatic cells in the seminiferous epithelium and play critical roles in regulating spermatogenesis by building a niche for germ cell development, providing nutrition to germ cells, and removing AGC and RB by phagocytosis. Sertoli cell phagocytosis is the most noticeable. Several consequences of phagocytotic removal of AGC and RB by Sertoli cells have been proposed. Removal of AGC and RB provides appropriate spaces in the seminiferous epithelium for healthy spermatogenesis. AGC can release autoantigens when necrosis occurs, which may induce autoimmune responses. Therefore, timely elimination of AGC before releasing autoantigens prevents autoimmune responses. After phagocytosis of AGC and RB, Sertoli cells recycle these apoptotic components as an energy source. This energy source would be important for Sertoli cells because circulating nutrients barely reach to the seminiferous epithelium due to the BTB and lacking blood vessels.
Based on origin, phagocytes can be classified into professional or nonprofessional phagocytes, respectively [49]. The hematopoietic phagocytes belong to professional and can infiltrate into the infected sites to ingest microbes and clean up damaged cells, which is critical for the innate defense against microbial infection. However, circulating phagocytes cannot migrate into tissues separated by the BTB, where resident tissue-specific phagocytes, which are considered as nonprofessional, are essential for maintaining tissue homeostasis by phagocytic removal of apoptotic substrates. The typical example is the mammalian testis. More than one hundred million sperms are produced each day in men during their whole reproductive age. Since a large number of male germ cells develop simultaneously within the seminiferous epithelium, there is a competition for space and nutrient if all the germ cells would develop into spermatozoa. Therefore, before maturing to sperm, most developing germ cells die through apoptosis, and the remaining spermatids shed most of their cytoplasmic portions as RB. Since the number of germ cells that Sertoli cells can support for finalizing their development is limited, we can speculate that the elimination of AGC and RB by Sertoli cells is important to ensure enough spaces for a healthy germ cell production and maintain tissue homeostasis. However, this speculation lacks experimental evidence. By contrast, there is a body of substantial evidence that the phagocytic removal of AGC and RB prevents an autoimmune response.
Male germ cells, which are mostly developed after the establishment of central immune tolerance, express a large number of novel proteins. These new proteins of male germ cells can be recognized as “foreign antigens” by the immune system. However, male germ cells do not induce an autoimmune response in the male reproductive tracts under physiological conditions due to their special immune microenvironment. The testis is a distinct immunoprivileged organ. Immune privilege represents a special immunological status that exists in several mammalian organs, including the eye, brain, pregnant uterus, and testis, where allografts or/and xenografts can survive without evoking immune rejection [50]. The testis tolerates both alloantigens and immunogenic autoantigens [51]. Various mechanisms are involved in the maintenance of testicular immune privilege [42], in which Sertoli cells play crucial roles.
Sertoli cells modulate testicular immune privilege with different mechanisms (Figure 5). The BTB protects the majority of the antigenic germ cells by sequestering autoantigens behind the BTB from immune components in the interstitial spaces. The BTB is formed between adjacent Sertoli cells near the basal membrane of the seminiferous epithelium (Figure 1). Several cellular junctions, including tight junction, gap junction, and basal ectoplasmic specialization, are involved in the BTB formation. The BTB divides the seminiferous epithelium to the basal and adluminal compartments [52]. The BTB limits the access of immune contents residing in the interstitial spaces into the adluminal compartment and sequesters the germ cell autoantigens within the adluminal compartments. Therefore, the BTB plays an important role in maintaining immune privilege within the adluminal compartments of the seminiferous epithelium. Although the BTB sequesters the late stage of germ cells in the adluminal compartments, the early stage of germ cells, including preleptotene spermatocytes and spermatogonia that reside outside the BTB, also produces antigenic proteins [53]. Moreover, certain germ cell antigens behind the BTB can egress into the interstitial spaces, and these antigens do not induce an immune response in the testis [54]. These observations suggest that the BTB cannot completely sequester germ cell antigens and should be only partially responsible for testicular immune privilege. In fact, the interstitial spaces outside the BTB also enjoy immunoprivileged status. A dense network, including the tissue structure, local immunosuppressive milieu, and systemic immune tolerance, coordinately regulates the immunoprivileged environment in the testis [42, 55]. In addition to the BTB, Sertoli cells produce various anti-inflammatory factors that regulate the testicular immune microenvironment [56]. Sertoli cells express activin A and activin B [57]. Activin A inhibits the expression of pro-inflammatory cytokines, thereby suppressing the testicular inflammatory responses. TGF-β is also predominantly produced by Sertoli cells in the testis. As an anti-inflammatory factor, TGF-β1 protects islet β-cell grafts after co-transplantation with Sertoli cells [58]. Moreover, Sertoli cells express Fas ligand (FasL) and programmed death ligand-1 (PD-L1), two negative immunoregulatory ligands which are both involved in the maintenance of testicular immune privilege [59, 60].
Role of Sertoli cells in testicular immune privilege. Sertoli cells produce various anti-inflammatory cytokines, including activin A and TGF-β, which inhibit immune response of dendritic cells (DC) and testicular macrophages (Mφ). Sertoli cells, together with germ cells, also express high level of Fas ligand (FasL) and programmed death ligand 1 (PD-L1) that can inhibit immune response by inducing apoptosis of T lymphocytes. Sg, spermatogonia; PSc, primary spermatocyte; SSc, secondary spermatocyte; Rs, round sperm; ES, elongated sperm.
Phagocytosis is a biological process that regulates immunity [61]. The phagocytic removal of AGC and RB by Sertoli cells is critical for timely elimination of autoantigens that may be released if AGC and RB are broken down. Toll-like receptors (TLRs) belong to a subfamily of pattern recognition receptors that initiate innate immune responses. Several TLRs are expressed in testicular cells and can be activated by their relative ligands [41, 62, 63]. Damaged tissues and necrotic cells may release endogenous TLR ligands, namely, damage-associated molecule patterns (DAMPs), which can induce noninfectious inflammatory response (Figure 3, left side). Various DAMPs, including high-mobility group box 1 (HMGB1) and several heat stock proteins (HSPs), have been recognized to activate TLR2 and TLR4 [64, 65]. Notably, HMGB1 and HSPs are abundantly expressed in male germ cells and can be released under stress conditions [66, 67]. Therefore, necrotic germ cells and RB breakdown may release endogenous TLR ligands, thus inducing inflammatory responses. Accordingly, physical trauma and chemical noxae that may damage germ cells are risk factors of chronic testicular orchitis [68]. An impaired removal of AGC leads to autoimmune orchitis [69]. The damaged male germ cells (DMGCs) induce the expression of various inflammatory mediators, including pro-inflammatory factors and chemokines, in Sertoli cells, thereby promoting leukocytes’ infiltration to the testis [70]. The DMGC-induced inflammatory cytokine expression and immune cell infiltrations require TLR2 and TLR4 in Sertoli cells. Therefore, timely removal of AGC and RB by Sertoli cells is essential for maintaining immune homeostasis in the testis to prevent autoimmune orchitis.
Another meaning of male germ cell death and removal of AGC and RB serves as energy sources for Sertoli cells [71]. After phagocytosis by Sertoli cells, AGC and RB fuse with lysosomes. AGC and RB are subsequently broken down and recycled as energy sources for ATP production. The most noticeable phenotype of Sertoli cells is the formation of numerous lipid droplets in the cell cytoplasm. These lipid droplets result from the breakdown of engulfed AGC and RB [13, 72]. Unlike the majority of cell types that mainly use glucose as an energy source, Sertoli cells predominantly use lipids to produce ATP [71]. The lipids from AGC and RB should be the main energy sources for Sertoli cells. Sertoli cells provide essential physical and environmental support for spermatogenesis, which are energy consumers. Corresponding to their function, Sertoli cells exhibit an active energy metabolism and produce high levels of ATP [71, 73]. While lipids and glucoses can be substrates for ATP production within cells under physiological conditions, the majority of cell types use glycogen to produce ATP, whereas lipids serve as energy storage. Only minor cell types, such as adipocytes, myocardial cells, and Sertoli cells, have been confirmed to actively utilize lipids to produce ATP. Why these cell types predominantly use lipids as energy sources remains unclear. However, the active usage of lipids by Sertoli cells is compatible with the special microenvironment in the testis. Sertoli cells are barely reached by the nutrition from the peripheral circulation due to the barriers in the basement membrane, BTB, and the absence of blood capillaries within the seminiferous epithelium. The simplest way for Sertoli cells to have enough energy to support spermatogenesis is to recycle the lipid contents of AGC and RB. Therefore, the phagocytic removal of AGC and RB by Sertoli cells is necessary for Sertoli cells to ensure their functions, which confers a novel meaning for a large number of germ cells to undergo apoptosis during spermatogenesis.
The mammalian testis possesses a special microenvironment for fulfilling its functions. The adluminal compartments of the seminiferous epithelium are separated from blood circulation by the BTB, and the circulating phagocytes cannot reach these regions. Therefore, Sertoli cells are responsible for the clearance of numerous AGC and RB during spermatogenesis. The phagocytic removal of apoptotic components by Sertoli cells is not only for waste disposal but also confers more meaning. In addition to prevention of autoimmune responses by removing autoantigens, recycling of apoptotic components can be used as an energy source for Sertoli cells. These biological processes would be particularly important in the tissues where immunogenic autoantigens are produced and seldom reached by circulating nutritious substrates. The mechanisms behind cell death and their removal by phagocytes, and their tissue-specific significance, are worthwhile to investigate in depth.
This work was supported by grants from the CAMS Initiative for Innovative Medicine (Nos. 2017-I2M-B&R-06, 2017-I2M-3-007) and the Major State Basic Research Project of China (Nos. 2016YFA0101001 and 2018YFC1003902).
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