Corporate Governance through Codes

The U.K.'s 1992 Cadbury Report defines corporate governance (CG) as the system by which businesses are directed and controlled. CG codes are a set of best practices designed to address deficiencies in the formal contracts and institutions by suggesting prescriptions on the preferred role and composition of the board of directors, relationships with shareholders and top management, auditing and information disclosure, and the remuneration and dismissal of directors. Codes can be distinguished from other modes of regulation in that they are formally non-binding, exemplified in the widely used ‘comply-or-explain' principle, issued by committees of experts, flexible in their application, built on the market mechanism for evaluation of deviations and evolutionary in nature. Several scholars consider the Cadbury Code (1992) as the original code, although the first code was created in 1978 in the U.S. Today about 90 nations worldwide have issued their own code(s). Regulating CG through codes is seen as a process, where ‘soft rules', e.g., codes, are favored over traditional ‘hard rules'. However, unlike ‘hard' law regulation, e.g., Sarbanes-Oxley Act of 2002, codes may not lead to the optimal CG; i.e., they merely reduce the worst corporate behavior but do not foster the best practices through strict compliance