Forum Significance

“Reflections on Voluntary Corporate Governance Codes: Is it now time to move on from a ‘soft law’ approach to a ‘hard law’ approach?”

Significance of Forum Theme

The idea of a voluntary corporate governance code was promoted very actively by the 1992 UK Cadbury Report. The adoption of the UK ‘Code of Best Practice’ (now called the ‘UK Corporate Governance Code’) has set an example that was followed by almost every sophisticated corporate law system in the world. The European Corporate Governance Institute provides a comprehensive list of current and former Corporate Governance Codes.

There is, therefore, no doubt that the idea of voluntary compliance with good corporate governance practices, based on the principle of ‘comply or explain’, has captured the imagination of the world. It is probably one of the best and most comprehensive examples of ‘self-regulation’ ever seen in any area where the society could be affected significantly, for current purposes by corporations.

However, is this the most effective way of ensuring that corporations act responsibly and adhere to good corporate governance principles? Have these Codes really improved corporate governance practices significantly? Is it time for a rethink and, at least in certain areas, start to rely more on ‘hard law’ and clearer expectations to ensure compliance?

The fact that the European Parliament and Council adopted Directive 2014/95/EU on 22 October 2014 ( may be indicative of a move towards more formal regulation of certain areas. There is an expectation that EU Member States must have legislation in place by 6 December 2016 to ensure that large undertakings report (for the financial year starting 1 January 2017) on and disclose non-financial information (through a non-financial statement) regarding:

  • environmental matters;
  • social and employee-related aspects;
  • respect for human rights;
  • anti-corruption and bribery issues; and
  • diversity on the boards of directors.

Is this regulatory approach one that other parts of the world will follow?

Views will differ whether more regulation is required or even desirable to ensure that companies adhere to good corporate governance principles and act in a responsible way to ensure long-term and sustainable growth. However, since the global financial crisis and the European financial crisis several scandals were uncovered in corporations that were considered to be ‘reputable’ and following the principles and recommendations of corporate governance codes ‘to the letter’. The list of corporations involved in some of the scandals are almost shocking and this list does not even include some of the recent revelations regarding a company like Volkswagen. Are there signs that we are relying on a ‘broken corporate governance regime’ (Jeroen Veldman) that needs fixing, but how? Is ‘hard law’ the answer?