Why Adopt Codes of Good Governance? A Comparison of Institutional and Efficiency Perspectives

TLDR

The study investigates whether the proliferation of corporate governance codes in civil law countries is driven by a desire to improve governance efficiency or to legitimize firms in global markets, and it seeks to deepen understanding of how new practices are reinvented during diffusion. Researchers compiled 2005 corporate governance codes worldwide, classified them by common or civil law systems, compared their scope, coverage, and strictness, and used t‑tests and probit models to test differences between the two legal traditions. Results show that civil law countries issue codes mainly for legitimation rather than efficiency, support a symbolic view of governance diffusion, and reveal that national legal systems and hard‑soft law interplay explain major differences in code coverage.

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: Given the global diffusion and the relevance of codes of good governance, the aim of this article is to investigate if the main reason behind their proliferation in civil law countries is: (i) the determination to improve the efficiency of the national governance system; or (ii) the will to “legitimize” domestic companies in the global financial market without radically improving the governance practices. Research Findings/Insights: We collected corporate governance codes developed worldwide at the end of 2005, and classified them according to the country's legal system (common or civil law). Then, we made a comparative analysis of the scope, coverage, and strictness of recommendations of the codes. We tested differences between common law and civil law countries using t‐tests and probit models. Our findings suggest that the issuance of codes in civil law countries be prompted more by legitimation reasons than by the determination to improve the governance practices of national companies. Theoretical/Academic Implications: The study contributes to enriching our knowledge on the process of reinvention characterizing the diffusion of new practices. Our results are consistent with a symbolic perspective on corporate governance, and support the view that diffusing practices are usually modified or “reinvented” by adopters. Practitioner/Policy Implications: Our results support the idea that the characteristics of the national corporate governance system and law explain the main differences among the coverage of codes. This conclusion indicates the existence of a strong interplay between hard and soft law.