Corporate-governance codes have proliferated in the 12 years since the Cadbury Code of Best Practice1 came into effect in the United Kingdom. In the past 2 years alone, new codes have emerged in every G-7 country2 except Japan, as well as in places as diverse as Brazil, Mauritius, the Netherlands, Oman, the Philippines, Russia, South Africa, Switzerland, and Turkey. Today, 50 countries have their own (Exhibit 1).
Governance codes emanate from securities commissions, stock exchanges, investors and investor associations, and supranational organizations. To put it simply, the codes embody their views of what good governance is all about. The Cadbury Code, for instance, made 19 recommendations addressing the structure, independence, and responsibilities of boards; effective internal financial controls; and the remuneration of directors and executives.
Since companies are not required by law to comply with codes of practice, there is clearly a risk they won’t work. The evidence, however, suggests that they do. In the United Kingdom, the Cadbury Code has sparked real improvements: for instance, the increasing professionalism of many boards (as measured by their composition, structure, and processes) can be directly related to it. Even in countries where progress has been slower, the codes’ existence...