Codes and Guidelines

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect.

Codes of corporate governance have developed for many reasons and in response to different circumstances, some specific to countries and, at other times, specific to events. Scholars Aguilera and Cuervo-Cazurra note the creation of a code in Hong Kong in 1989 and another in Ireland in 1991. The first widely recognized national code of corporate governance was released in the United Kingdom in 1992 under the leadership of Sir Adrian Cadbury. It was titled “The Financial Aspects of Corporate Governance” (the “Cadbury Code”). Following serial revisions under different chairs, the code is now administered by the Financial Reporting Council (FRC) under the name “The UK Corporate Governance Code.” The first influential international code was produced by the Organisation for Economic Co-operation and Development (OECD) in 1999 following recommendations of a business advisory committee led by Ira Millstein.

The focus on codes came in the wake of economic stagnation in the 1970s and the rise of corporate raiders in the U.S. in the 1980s. Progress in code development stemmed from interest among four major parties: stock exchanges, government, companies, and institutional investors. Stock exchanges pressed for governance codes to enhance the reputation of their markets and member companies as a means of attracting capital. Institutional investors supported codes, too, often out of uncertainty about how and when to exercise rights at companies, and because of concerns over a lack of access to boards presiding over under-performing firms.

While many factors leading to codes differed from country to country, there were also similarities. Usually, the process began with dissatisfaction with the existing corporate governance regime within at least one of the major ‘constituencies’ involved in capital markets (issuers, financial intermediaries, regulators, the accounting profession, the bar, institutional investors, and the investing public.) Often, there were scandals igniting interest. The Cadbury Code, for instance, gained traction from pension and governance failures that were exposed in the 1990s. Another common driver was concern that capital was being diverted to other markets because of perceived deficiencies in the governance regime.

Typically, an authoritative intermediary—either the stock exchange or government—herded issuers together, sometimes with, and sometimes without, investors and other market parties, to craft a national code. Often, the government sought to encourage the process by threatening legislation if appropriate voluntary standards were not agreed upon. Once a code had been written, governments usually moved quickly to endorse it and encourage or require its application to all listed corporations. Sometimes, a few code provisions migrated into law; more often, the purpose of the code was to provide a flexible extension of regulation into areas where it was felt that rules might be too restrictive.

Earliest codes were aimed squarely, and almost exclusively, at corporations. More recently, governance codes have been developed to address the behaviour of other market actors, such as institutional investors and intermediaries via stewardship codes.

Codes for companies: Company oversight boards operate by means of a flotilla of formal governance documents including the articles of incorporation, by-laws, corporate governance guidelines, committee charters, and codes of conduct. Codes of corporate governance are meant to provide flexible standards and best practices for companies to consider alongside this governance framework. Although each company varies in the practices, policies, and procedures that make up its framework (given unique businesses and industries), there are certain commonalities that are overarching amongst all companies. Codes of corporate governance often serve as a tool to outline the structure and behaviour of the board, including how it interacts with management. Codes may serve to either supplement or go beyond any minimum governance regulations to which the company may already be subject. As an example, law may allow a corporation’s directors to opt for any form of board leadership they prefer. A code may suggest considerations directors should take into account when making their choice

Codes for investors: Best practice standards addressing investors were a small part of early corporate governance codes, such as Cadbury and the OECD. Normally, text focused not on the institution’s own governance, but on the shareowner’s responsibility to support adherence to the corporate code by portfolio companies. More recently, the rise of ‘stewardship’ codes in different jurisdictions has expanded into detailed guidance on such investor responsibilities. Further, some codes touch on the governance characteristics of the investor itself. The first such effort was produced by the International Corporate Governance Network (ICGN) as a multinational guide. The most prominent national example is the UK’s Stewardship Code. A U.S. example is the 2007 Clapman Report, produced at Stanford Law School.