Codes of Good Governance

• Author: Ruth V. Aguilera,Alvaro Cuervo‐Cazurra
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00737.x
• Published date: 01 May 2009
• Date: 01 May 2009

Codes of Good Governance

Ruth V. Aguilera and Alvaro Cuervo-Cazurra*

ABSTRACT

Manuscript Type: Review

Research Question/Issue: We review the recent developments in the area of codes of good governance, a set of best practice

recommendations regarding the behavior and structure of the board of directors.

Research Findings/Results: Our review of the literature on codes of good governancehighlights their rapid spread around

the world and how academic research has lagged behind in analyzing this topic. Despite the criticism that the codes’

voluntary nature limits their ability to improve governance practices, codes of good governance appear to have generally

improved the governance of countries that have adopted them, although there is need for additional reforms.

Theoretical Implications: Unfortunately, research on codes of good governance has developed in insolation with little

cross-fertilization acrossthe different disciplines. We propose a multi-level framework to discuss three main topics that have

emerged within the codes literature: the motivations behind the diffusion of codes across countries and its implications for

convergence of corporate governance practices; the content of the codes and their “comply or explain” dimension; and the

relationship between code compliance and f‌irm performance. We conclude by proposing four areas of future research.

Practitical Implications: Code development, adoption, and compliance are directly related to issues surrounding the

governance of the f‌irm, and in particular to all the interactions that a director has inside and outside the f‌irm. Codes are

regulations that emerge from policy-making negotiations between multiple stakeholders, such as the state (via the stock

market regulators) and the investors.

Keywords: Corporate Governance, Codes of Good Governance

INTRODUCTION

We review the state of information on the topic of codes

of good governance, a set of best practice recommen-

dations regarding the behavior and structure of the board

of directors. An important debate in the international corpo-

rate governance world is whether countries should develop

hard laws, such as the United States with the Sarbanes-

Oxley Act 2002, or whether soft regulation, such as codes of

good governance, are suff‌iciently effective to improve exist-

ing corporate governance practices across countries, as well

as to address the pressing issues of corporate accountability

and disclosure.

Although the f‌irst country to issue a code of good gover-

nance was the United States in 1978 and the second country

was Hong Kong in 1989, the pace of issuance has gathered

speed ever since, particularly after 1992 when the United

Kingdom’s Cadbury Report was issued (Cuervo-Cazurra

and Aguilera, 2004). By mid 2008, 64 countries had issued

196 distinct codes of good governance. Additionally, there is

a large variety of issuers of codes, which include not only

stock markets or its regulators, but also investor associa-

tions, employer associations, professional associations, and

even governments.

The explosion in the issuanceof codes of good governance

has been accompanied by an increase in the number of

articles in academic publications. For example, since 1997,

Corporate Governance: An International Review has published

14 papers that explicitly discuss the nature of codes in a

given country and 59 papers that have the phrase “gover-

nance code” in their abstract. Obviously, this shows that the

topic of codes of good governance is central to the f‌ield and

that there is plenty to take stock from.

However, there is little systematic analysis of how codes

of good governance have affected how corporations are

structured or how managers behave across different corpo-

rate governancesystems. For instance, a recent review of the

literature on corporate governance published in the Hand-

book of the Economics of Finance (Becht, Boltonand Roell, 2003)

*Address for correspondence: Sonoco International Business Department, University

of South Carolina, Moore School of Business, 1705 College Street, Room 557, Colum-

bia, SC 29208, USA. Tel: 1-803-777-0314; Fax: 1-803-777-3609; E-mail: acuervo@

moore.sc.edu

376

Corporate Governance: An International Review, 2009, 17(3): 376–387

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00737.x