When the Solution Becomes the Problem: The Triple Failure of Corporate Governance Codes
Sjåfjell, Beate, When the Solution Becomes the Problem: The Triple Failure of Corporate Governance Codes (August 24, 2016). Working paper version of chapter published in Jean Jacques Du Plessis and C.K. Low (eds), Corporate Governance Codes for the 21st Century: International Perspectives and Critic
24 Pages Posted: 24 Aug 2016 Last revised: 5 Oct 2018
Date Written: August 24, 2016
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? 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 chapter discusses corporate governance codes in a critical perspective. Drawing on examples of corporate governance codes from selected jurisdictions from around the world, the chapter concludes that corporate governance codes, generally speaking, are a triple failure. While recognising that there are positive exceptions, corporate governance codes are on a whole 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 chapter identifies if this merely involves codifying the detrimental aspects of the codes. The chapter does not take the stance that reform of business and financial law is not required; quite the opposite, reform is urgently needed. However, the chapter 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.
In Section 2, this chapter introduces the context for the critical analysis including the significance of business and finance in meeting the convergence of crises we are facing globally, and the state-of-the-art research on important barriers to corporate sustainability. The triple failure of the corporate governance codes is the topic of Section 3. The three interlinked aspects of this failure consists of the way the corporate governance codes are informed by and promote the destructive shareholder primacy drive, how that leads to an externalisation especially of social and environmental costs, and how the current tendency to rectify the latter are characterised by superficial attempts at including broader societal interests, which are insufficient in their incremental approach to mitigate the deeply entrenched nature of the shareholder primacy drive. Section 4 presents tentative ideas on the kind of legal reform that is necessary.
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