Corporate Governance Codes: A Review and Research Agenda

• Author: Francesca Cuomo,Christine Mallin,Alessandro Zattoni
• Date: 01 May 2016
• DOI: http://doi.org/10.1111/corg.12148
• Published date: 01 May 2016

Corporate Governance Codes: A Review and

Research Agenda

Francesca Cuomo*, Christine Mallin and Alessandro Zattoni

ABSTRACT

Manuscript Type: Review

Research Question/Issue: This study reviewsprevious country-level and firm-levelstudies on corporate governance codesup

to 2014 in order to highlight recent trends and indicate future avenues of research.

Research Findings/Results: Our data show that research on codes increases over time consistently with the diffusion and the rel-

evance of the empirical phenomenon. Despite previous studies substantially enriching our knowledge of the antecedents and con-

sequences of governance codes, our study shows there are still several opportunities to make significant contributions in this area.

Theoretical Implications: Agency theory is the dominant theoretical framework, although other theoretical perspectives

(especially the institutional one) are increasingly adopted. Future studiesshould be aimed at widening and combining various

theoretical lenses so as to develop new interpretations and a better understanding of governance codes.

Practical Implications: Legislators andpolicymakers should continue to developand update the recommendationsof national

governance codes in order to address the potential failures of corporate governance mechanisms in place.

Keywords: Corporate Governance, Good Governance Codes, Corporate Governance Guidelines

INTRODUCTION

Since the publication of the Cadbury Code in 1992, there has

been a proliferation of corporate governance codes and

guidelines (hereafter codes). As a result, over the last two

decades codes have become a popular means of encouraging

corporations to increase their transparency and accountability

(Mallin, 2013). Simultaneously with the worldwide diffusion

of corporate governance codes, governance scholars have

devoted increasing attention to understanding codes’charac-

teristics, the rationale behind their diffusion, and the implica-

tions for governance effectiveness and firm performance.

Despite the increasing attention by governance scholars, a

previous review (Aguilera & Cuervo-Cazurra, 2009) covering

publicationson this topic until the middle of 2008 showedthat

there was still “anapparent lag between advancesin the crea-

tion of codes and the studies analyzing the importance of

codes”(p. 385). To address this lag, the review invited gover-

nance scholarsto extend their studies in several directions, for

example to provide a more careful examination of the codes’

content,to analyze the effects of thecode’s issuer on its content

and enforceability, to examine the consequences of codes

issued by transnational institutions, to analyze the evolution

of codes over time, andto explore in more depth the relation-

ship between code compliance and firm performance.

In addition, the recent financial crisis and the related

corporate scandals have underlined the failure of existing

governance mechanisms, including good governance codes.

Therefore scholars, public opinion, and politicians have invited

legislators and the financial community to reinforce both regu-

lations (hard law) and governance codes (soft law) in order to

increase transparency and accountability of, and to restore

battered reputations and investor confidence in, financial and

non-financial companies (e.g., Mallin, 2013; Zattoni & Cuomo,

2010). As a consequence, since the first appearance of the

global financial crisis in 2007–08, the number of corporate

governance codes has increased exponentially over time.

Consistent with the growing diffusion of codes and the call

for new research on this topic (Aguilera & Cuervo-Cazurra,

2009), there has been a proliferation of studies on governance

codes, so that the number of papers published since 2008 is sig-

nificantly higher than the number of papers published before

then. After such a recent and intense effort to reform corporate

governance practices and to investigate the characteristics and

the effectiveness of corporate governance codes, it is time to

undertake a comprehensive review of the contribution of such

alargeflow of studies to the advancement of our understand-

ing of codes.

That being said, the aim of this article is to undertake a re-

view of previous country-level and firm-level studies on corpo-

rate governance codes in order to take stock of the knowledge

accumulated and to highlight future avenues of research. This

study extends the results of a previous review on codes

(Aguilera & Cuervo-Cazurra, 2009) by significantly increasing

*Address for correspondence: Francesca Cuomo, Lecturer in Corporate Governance,

Norwich BusinessSchool, University of East Anglia(UEA), Norwich NR4 7TJ, UK. Tel:

+44 (0) 1603591506, E-mail: f.cuomo@uea.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12148

222

Corporate Governance: An International Review, 2016, 24(3): 222–241

the number of papers and by expanding the length of the

period under investigation. The review focuses on more recent

phenomena, such as transnational codes, the diffusion of soft

law,theimpactoftheglobalfinancial crisis on the develop-

ments of governance codes, and the co-existence of hard and

soft law. At the same time, the review devotes particular

attention to more recent studies, i.e. those published between

2009 and 2014.

In order to reach this goal, we first empirically analyze the

speed and the path of the worldwide diffusion of corporate

governance codes issued until the end of 2014. For this

purpose, we take a wide view of ‘codes’, that is, we analyze

formal as well as informal codes, including also national and

transnational principles and guidelines, e.g. Pan-European

and Organisation for Economic Co-operation and Develop-

ment (OECD) principles. Then, following previous reviews

(e.g., Pugliese, Bezemer, Zattoni, Huse, Van der Bosch, &

Volberda, 2009),we analyze the literature andcodify previous

studies on corporate governance codes using the following

criteria: (i) the type of articles (i.e., conceptual, empirical), (ii)

the theories used (i.e., agency, institutional, other theories,

multiple theories), (iii) the research topics (at both country

level and firm level). In addition, only for empirical studies,

we also consider: (iv) the research setting (i.e., single country

or multiple countries), and (v) the data analysis (qualitative,

quantitative, mixed methods, experiment). Finally, for each

paper we identify the major findings.

The plan of the paper is straightforward. First, we describe

the diffusion and the characteristics of corporate governance

codes around theworld. Second, we present the methodused

to select and analyze previous studies on codes and we

summarize their characteristics. Third, we outline the results

of our review of recent country-level and firm-level studies

on corporate governance codes. Then, in the discussion sec-

tion, we integrate previous literature and empirical evidence

on corporate governance codes, highlight new directions for

future research, and discuss the main limitations of our

review. Finally, we present themain conclusions of our study.

CORPORATE GOVERNANCE CODES

Aims and Scope of Codes

Contrary to other forms of regulation (i.e., hard law or hard

regulation such as the Sarbanes-Oxley Act of 2002),

governance codes (i.e., a form of soft law or soft regulation)

are “formally nonbinding and voluntary in nature, issued by

multi-actor committees, flexible in their application, built on

the market mechanism for evaluation of deviations and

evolutionary in nature”(Haxhi & Aguilera, 2014, p. 2). They

provide a voluntary means for innovation and improvement

of corporate governance practices as the “comply or explain”

and the “freedom with accountability”principles form the

foundation of their application (Aguilera & Cuervo-Cazurra,

2004, 2009; Mallin, 2013). This means that companies have

the option to comply with codes’recommendations or to

explain the reasons why they do not comply. The rationale

behind these principles is to allow firms some flexibility –i.e.

to choose which corporate governance structure to adopt to

better pursue their objectives –while guaranteeing better

transparency to the market.

Following the dominant agency theory (e.g.Fama & Jensen,

1983; Jensen & Meckling, 1976), corporate governance codes

encourage the board of directors to play an active and inde-

pendent role in controlling the behavior of top management.

Consistent with this view, the main codes’recommendations

on boards suggest increasing the number of non-executive

and independent directors, the splitting of Chairman and

CEO roles, the creation of board committees (audit, remuner-

ation, and nomination committees) made up of independent

non-executive directors, and several other practices aimed at

increasing board accountability and effectiveness (see Aguilera

& Cuervo-Cazurra, 2009; Zattoni & Cuomo, 2008).

Corporate governance codes can be designed at three hier-

archical levels: international, national, and individual firm

level. First,there are codes issued by transnational institutions

(such as Pan-European, Commonwealth, OECD, Interna-

tional Corporate Governance Network [ICGN]) to promote

the diffusion of good governance practices around the world

or to increase governance standards in a specific geographic

region. Second,there are codes issued –individually or jointly

–by several institutions within individual countries (e.g., the

stock exchange, the government, and also investors’,

directors’, managers’or professional associations) with the

objective of pos itively influencing corporate governance

practices in that specific national environment. Third, there

are codes issued by individual firms (such as the code issued

by General Motors) whose objective is to establish, and to

communicate to investors and other stakeholders, the gover-

nance principles adopted by the firm.

Regarding national codes, Aguilera and Cuervo-Cazurra

(2004) show that the type of issuer differs across and within

countries. In addition, they show that the type of institutional

pressure to adopt codes’recommendations varies with the

type of issuer: it is a coercive pressure when codes are issued

by the stock exchange or investors, a mimetic pressure when

codes are issued by a managers’association, and a normative

pressure when they are issued by the remaining types of

issuers.

National and international codes are generally issued for

listed companies, although there are also codes designed for

non-listed companies or even for both listed and non-listed

companies. More recently, there has also been the issuance of

codes designed for companies with a specific ownership

structure (e.g., state-owned or family-owned), for different

types of financial institutions (e.g., commercial banks,

institutional investors, mutual funds), or for voluntary and

charitable organizations.

The disclosure of the compliance with national corporate

governance codes differs among countries. More precisely,

the disclosure on the adoption or explanation can be manda-

tory (i.e. voluntary adoption and mandatory disclosure) or

voluntary (i.e., voluntary adoption and voluntary disclosure).

On the one hand, this mandatory disclosure can be required

by the listing authority (as, e.g., in Australia, Canada, Estonia,

Luxembourg, Malta, Malaysia, Russia, Singapore, and the

UK,) or by law (as, e.g., in several EU countries, including

Belgium, France, Germany,I taly, the Netherlands, and Spain

1

).

When the disclosure of governance practices is mandatory,the

effectiveness of governance codes increases, because the exter-

nal (i.e., market) disciplinary mechanism can work well only

with informative disclosure on adoption and/or explanation.

223CORPORATE GOVERNANCE CODES

© 2015 JohnWiley & Sons Ltd Volume 24 Number 3 May 2016