When the Solution Becomes the Problem: The Triple Failure of Corporate Governance Codes
Corporate governance codes appear to be regarded as the ultimate sign of a modern and efficient market economy. By-passing the slow machinery of legislation, corporate governance codes are a possibility for corporations and shareholders to signal what they perceive as best practice and nudge the governance of corporations in the desired direction. Symptomatically, when corporate legislation in a country is amended, the corporate governance code is too, to always be one step ahead. But in what direction are these steps taking us? And who is choosing the means and the goals? Is efficiency the goal, and if so, how is this defined and how is this sought achieved?
Already in 2006, Steen Thomsen criticised the codes for lacking ‘theoretical or empirical rationale’, to the extent that they are ‘unlikely to do much good (and if so only by accident)’. Since then, corporate social responsibility language has made its way into ever more codes, without this necessarily resolving any problematic issues with the codes.
This paper discusses the evolution of corporate governances codes, and analyses their goals and their means in a critical perspective. Based on an analysis of corporate governance codes from selected jurisdictions from around the world, the paper concludes that corporate governance codes, generally speaking, are a triple failure. While recognising that there are positive exceptions, corporate governance codes do on a whole not promote any meaningful efficiency goals: they are informed by and support the shareholder primacy drive, with its negative effects for society, for business and for all shareholders with anything but an extremely short-term perspective. The corporate governance codes facilitate and support a system that is based on externalisation of environmental and social costs of business. Attempts at introducing corporate social responsibility language are generally superficial and not designed to achieve the internalisation of externalities that is required if business and finance is to be sustainable, in the economic, environmental and social sense.
Moving from so-called soft-law to hard-law will not rectify the problems that this paper identifies if this merely involves codifying the detrimental aspects of the codes. The paper does not take the stance that reform of business and financial law is not required; quite the opposite, reform is urgently needed. However, the paper addresses the terms of such reform and argues that a fundamentally new approach is required, based on a truly modern and systemic understanding of the role of business and finance and its regulatory ecology in achieving a safe and just operating space for humanity.