What Determines the Content of Corporate Governance Codes?

• DOI: http://doi.org/10.1002/bl.30041
• Published date: 01 March 2016
• Date: 01 March 2016

4 BOARD LEADERSHIP

What Determines the

Content of Corporate

Governance Codes?

Caroline Oliver interviews Carsten Gerner-Beuerle

Ever wondered how those corporate governance codes, from which so much

governance practice is derived, come about? A few months ago, Board

Leadership’s editor, Caroline Oliver, came across Working Paper Number 5

in the London School of Economics’ “Law Society and Economy” Series on

“Determinants of Corporate Governance Codes.”1 She tracked down its author,

Carsten Gerner-Beuerle, and asked him a few questions. …

Caroline: Can you tell me a bit

about your background?

Carsten: I am an Associate Profes-

sor of Law at the London School of

Economics and Political Science who

conducted research on corporate

governance, securities regulation,

and law and economics and prepared

reports on corporate governance and

financial regulation for the European

Commission and the European Parlia-

ment. One strand of my research on

corporate law and securities regula-

tion deals with the legal and nonlegal

determinants of regulatory reform,

the international diffusion of legal

innovations, and the interrelationship

between the regulatory environment

and economic variables. I generally

use a comparative and interdisciplin-

ary approach. My current projects

include analyzing the European Union

(EU) harmonization program in com-

pany law and capital markets regula-

tion to facilitate discussions about

how regulatory authority should be

allocated between the EU and the

Member States to promote inte-

grated markets and ensure efficient

regulatory outcomes. I am also work-

ing on a comprehensive treatise on

comparative company law that exam-

ines in-depth some of the main legal

traditions of the world, compares the

regulatory strategies employed, and

explains the observed differences in

historical perspective.

Caroline: What got you interested

in the origins of corporate governance

codes?

Carsten: Having worked on corpo-

rate governance for some time and

teaching at LSE, I saw that corporate

governance codes are very influential

in creating what is seen as best prac-

tice for boards and others involved

in corporate governance. It therefore

seemed to me important to analyze

how such codes are developed and

lead to the dissemination of new

techniques in regulating corporate

governance in a changing political,

economic, and legal environment.

Caroline: How did you go about

your research?

Carsten: I analyzed 106 corporate

governance codes of 23 European

countries and tried to classify them

according to:

•the extent to which the drafting

committee was dominated

by representatives of the

investment community, issuers’

representatives, public regulators,

or others. It is important to note

that most codes are not legislative

initiatives but private initiatives for

example, by stock exchanges and

industry bodies; and

•the type of legal framework used

by the relevant country.

I then looked at the provisions of

the codes and analyzed them accord-

ing to:

•how prescriptive they are, and

•whether they strengthen the

position of outside investors

… in relation to a number of issues

including:

•independence,

•board and board committee

composition, and

•separation of the roles of CEO

and chairman of the board.

Caroline: What did you find?

Carsten: Certainly, some codes are

more onerous and more prescriptive

than others. For example, some specify

the number of nonexecutive versus

executive directors (senior managers)

that should be on the board, whereas

other codes use terms such as suffi-

cient nonexecutives, leaving wide room

for interpretation by individual boards.

Some codes are clear that the roles of

chair and CEO should be separated

and, for example, specify a “cooling-

off period” before a retiring CEO can

become a chair. Others are much less

prescriptive on such separation. In

some codes what represents “indepen-

dence” is spelled out (for example, the

United Kingdom’s code gives a list of

criteria2). In other codes what is meant

by the term is left much vaguer.

I had also thought that it was likely

that we would find that the content

of codes was heavily influenced by

the composition of the committees

that produced them. For example, I

thought we might find that codes pro-

duced by committees with significant

representation from investors would

be more onerous and prescriptive than

the content of codes produced by

other groups. In fact, I found no cor-

relation between composition of code-

authoring committees and the code

content.

However, I did find clear differences

between different countries when

grouped by legal families. By “legal

families” I mean groups of countries

that operate in accordance with differ-

ent legal frameworks such as English

Common Law, the Civil and Commer-

cial Codes of France, or the German or

Scandinavian systems. I also found dif-

ferences related to the nature of typical