Determinants of Corporate Governance Codes

Abstract

Abstract:Corporate governance codes are an increasingly prominent feature of the regulatory landscape in many countries, yet remarkably little is known about the determinants of corporate governance reform. Potential determinants include: (1) the diffusion of an international benchmark model of good governance; (2) a country's legal system; (3) the desire to attract foreign investors; and (4) the influence of interest groups. I construct a proxy for the investor-friendliness of 52 corporate governance codes of different jurisdictions and collect data on the code issuers. I find strong evidence that the drafters of codes emulate international benchmark models and that jurisdictions belonging to different legal traditions use different regulatory strategies, some evidence that portfolio equity inflows are associated with the investor-friendliness of codes, and no evidence that interest groups succeed in affecting rules. The article suggests a method for the modeling of legal evolution, convergence, and the political economy of corporate governance codes.Keywords: Corporate governance codes; board structure; empirical legal research; interest group politics; convergence. * Law Department, London School of Economics and Political Science. I am grateful to Michael Blackwell, Tom Kirchmaier, Edmund-Philipp Schuster, Mathias Siems, Hanne Søndergaard Birkmose, Moqi Xu, and the participants of workshops at the LSE, the Department of Financial & Management Studies, SOAS, University of London, and the University of St. Gallen for valuable comments. Special thanks are due to Michael Schouten for the idea to code corporate governance committees at the member-level and for collaboration in collecting the data. All mistakes are mine. 5/2014 2 INTRODUCTIONCorporate governance codes play an increasingly important role as a regulatory tool and part of a country's corporate governance system. In many jurisdictions, listed companies are now required to publish a statement as part of their annual report indicating whether they comply with the corporate governance code in force in their jurisdiction and provide an explanation if they deviate from the code's requirements. 1 The effectiveness of this so-called 'comply or explain' principle, and generally of regulating by means of soft law, has been discussed extensively in the law and finance literature (see, for example, Andres and Theissen 2008;Arcot, Bruno, and Faure-Grimaud 2010;MacNeil and Li 2006). However, remarkably little is known about the drivers of corporate governance reform and the factors that determine the content of the codes. This is problematic, given that the regulatory goal of corporate governance codes to strengthen the accountability of managers depends not only on the compliance by companies with the code provisions, but also on the form and content of these provisions. Explanatory factors may or may not be conducive to the goal of investor protection, and understanding their influence on the drafting process is important in assessing how corporate governance c...

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