Over the past 12 years, since the Cadbury Code of Best Practice came into force in the UK, a plethora of corporate governance codes have emerged. In the last two years alone, they have been adopted not only by the G7 countries, except Japan, but also by many others, such as Brazil, the Netherlands, Oman, the Philippines, Mauritius, South Africa, Switzerland and Turkey. To date, corporate governance codes exist in 50 countries.

Corporate governance codes are developed by various institutions: securities market commissions, stock exchanges, investors and their associations, and supranational organizations. By and large, these codes reflect the views of the authors on good corporate governance. For example, the Cadbury Code contains 19 recommendations regarding the structure, independence and responsibility of the board of directors, methods of internal financial control, compensation to members of the board of directors and top managers.

The law does not require companies to strictly follow the codes, so there is a risk that their provisions will not be followed. But practice shows that corporate governance codes work. Thus, thanks to the Cadbury Code, there have been noticeable improvements in the practice of British companies. For example, the improvement in the professionalism of the boards of directors of many organizations (measured by their composition, structure and processes) can be directly linked to the introduction of a code. Even in less successful countries, the advent of codes has at least brought corporate governance into the public eye, and now managers and directors have a better understanding of what is expected of them. However, such a rapid success of the codes is alarming and causes some concern about their future fate.

The groundbreaking Cadbury Code was adopted in response to a series of corporate scandals in the early 1990s and the collapse of a number of UK-listed companies.

The creators of the Code wanted to help companies improve their management practices and thereby prevent future scandals and restore public and investor confidence in the business. The codes that followed the Cadbury Code had the same purpose. In emerging markets, where the level of transparency tends to be much lower, the importance of codes is even more important: financial market policymakers fear that scandals will trigger a wholesale dumping of securities and a systemic crisis.

Codes vary in scope and detail, but almost all proclaim four fundamental principles: equal treatment of all shareholders, whose rights must be respected; accountability of the board of directors and management; disclosure of information and transparency, that is, the timely and complete provision of financial and other reporting; responsibility for observing the interests of minority shareholders and other interest groups, as well as for strict adherence to the spirit and letter of the law.

Experts around the world increasingly agree that codes based on the above principles not only protect investors from fraud and careless management of their assets, but can also reduce the cost of raising capital.

These benefits are provided in different ways depending on the characteristics of a particular country.

The attractiveness of a code, unlike a law, lies in its flexibility. Of course, it is impossible to legislate every aspect of corporate behavior. Legislative directives would be ineffective with respect to many corporate governance provisions. Moreover, companies need room to maneuver. For example, a company that unexpectedly loses a CEO wants the position to be temporarily filled by the current chairman of the board of directors until a new CEO is found, but this is probably not allowed by legislation that prohibits one person from combining two positions. And most importantly, the code can be supplemented with provisions (articles) that would reflect the changing needs of organizations much faster than the law.

Despite the apparent "toothless", codes, no doubt, improve corporate governance. They draw attention to it and thus “heat up” the discussion about the principles of business regulation. Codes, by clarifying examples of global best practices, educate businesses. Developed by influential institutional investors, they have a direct impact on the performance of corporations, as they clearly indicate what investors expect from companies in which they have invested.

Codes are particularly powerful when supported by mandatory disclosure rules. This approach is known as "fit or explain". For example, after the adoption of the Cadbury Code, the London Stock Exchange required listed companies to indicate in their annual reports how well they complied with the code, and in case of violation of any of its provisions, explain the reasons. The fit-or-explain approach is now being adopted by many other countries, including Australia, Canada, Mexico, the Netherlands and Singapore, as well as the United States, where legislation is favored (the most notable recent example is the Sarbanes-Oxley Act). The US Securities and Exchange Commission is now requiring companies to report on the presence of financial experts on their audit committees or to explain the reasons for their absence.

The fit-or-explain approach has made corporate governance practices much more open.

These requirements force companies to think seriously about their corporate governance, as the rationale for any derogation from the code must be publicly proven. And they are especially effective in countries where the media and shareholder activists closely monitor the behavior of corporations.

They know that corporations would rather comply than be in the public eye and explain to the media why they don't comply with the code.

For example, to comply with the new Dutch corporate governance code, ABN Amro recently eliminated an internal rule that made it unnecessarily difficult to take over a company.

Of course, the provisions of corporate governance codes and articles of laws should support each other. All countries have similar legislation, such as requiring companies to file financial statements with regulators. Legislation and government regulation, we believe, should set the foundation, that is, determine the minimum requirements for many items, such as financial reporting, audit requirements, frequency and agenda of shareholder meetings. Unlike legislation, corporate governance codes can promote best practice in these areas as well as in the areas of shareholder relations and executive compensation.

Over time, the division of areas of application of laws and codes will change - in different countries in their own way. To prevent financial scandals, it will probably be necessary to strengthen the responsibility

audit committees. At the same time, regulators in some countries, where the situation is much calmer, are easing capital requirements. This was made possible by improving

legislation and the emergence of new forms of financial contracts that allow creditors to more effectively protect their rights.

In some emerging markets, where awareness of corporate governance issues is low and society does not pay much attention to the activities of companies, on the contrary, preference should be given to legislation, rather than codes, which are not mandatory to comply with.

Despite the great success of codes promoting positive change in corporate governance, three worrying trends have emerged. Paradoxically, it was the success of the use of codes that gave birth to them.

The first is the passion for regulation. Since codes improve corporate governance, it seems tempting to many to broaden their scope and add new details.

For example, a 2003 UK study led to recommendations to increase the number of articles in the 1998 Consolidated Code (the successor to the Cadbury Code) from 45 to 82. Some proposals, such as expanding the role of senior independent directors, were lukewarmly received in Great Britain: the risk was too great that companies would ignore these rules and this would negatively affect the credibility of the code as a whole.

The second is the exaggeration of the principle of "correspond" to the detriment of "explain". Increasingly, companies' attempts to explain why they deviated from the provisions of the codes are swept aside, as if the principle of "comply or explain" has been reinterpreted by someone to "comply or violate." This tendency, reinforced by the desire to judge the quality of corporate governance based on simple comparisons of "performed or not performed" rather than in-depth analysis, detracts from the main advantage of codes - their flexibility.

Thirdly, the gradual convergence of the content of the codes of different countries can create the feeling that all companies should meet the same standard. This convergence is facilitated by the widespread practice of corporations listing their shares in different countries, as a result of which best practices are disseminated around the world.

In addition, various industry associations advocate the unification of standards in countries and companies in which their members invest. Rating agencies around the world use similar criteria to assess corporate governance. Supranational organizations such as the Organization for Economic Co-operation and Development (OECD) publish highly influential codes; The European Union is eliminating differences in the corporate governance standards of its members. Even in developing countries, codes incorporate elements of British and American corporate governance practices, driven by the need to compete for foreign capital.

The convergence of corporate governance codes is welcome, as it indicates a broad acceptance of their apparent underlying principles. But you shouldn't go too far.

For example, many countries reproduce the British Combined Code. However, due to the emphasis on board independence, the latest version may not be suitable for emerging markets, where very often companies have only one main owner. In such countries, it is hardly appropriate to insist on the appointment of a senior independent director and compliance with the requirement to hold meetings of the board of directors without management staff. Corporate governance codes in emerging markets should aim at more fundamental principles, such as full and timely disclosure of information or assurances that shareholders who own a controlling stake do not harm minority shareholders.