By Nolan Haskovec June 2012
Foreword by Ira Millstein
The Millstein Center’s Codes and Standards Program was founded after Lisa Tepper Bates, then a student in one of my corporate governance classes, wrote a final paper proposing a code for the U.S. Her argument was that authoritative national guidelines, if well framed, would be superior to rigidlaw and would encourage long term behavior. Indeed, codes of corporate governance around the world are intended to provide guidance at the frontier where law ends and market practice begins. Where they exist, principles can encourage corporate boards and shareholders to better understand common interests and better define expectations of each other. The question was whether a national code was wise, feasible, or desirable for the U.S.
To address the issue, the Center—with guidance from a balanced steering committee—undertook research to better understand how and under what circumstances codes have worked or failed to improve performance or reduce risk, particularly in Europe. In the course of roundtables and academic inquiry, it was learned that not all codes achieve their objectives. But many do—and there is strong support for them from among corporate directors, executives, and shareholders. The reasons parties cite are important for the U.S. to study. Corporate governance codes appear to help boards, managers, and investors identify their respective responsibilities. They give those with ‘skin in the game’ more of a voice in framing practices than intermediaries. They can build grounds for long term behavior. They can help strengthen board oversight. They can illuminate ways for directors and boards to communicate. And codes can help minimize the intrusion of law and regulation into market practice.
One strength of codes over law is that they can more easily adapt over time to changes in the market. Moreover, stewardship codes emerging alongside governance codes aim to foster responsible and constructive investor behavior, something boards need in order to build long term value.
Despite the apparent advantages codes have brought markets, the Codes and Standards Program also uncovered downsides and pitfalls. Some codes have failed for lack of endorsement by key parties, or for lack of leadership. Some have featured principles that have become as rigid and prescriptive as law. Some stray into micro management.
Part of the advantage of the U.S. coming late to the exercise, though, is being able to learn from the experience of others. Findings in this working paper contribute to greater understanding of what codes are and are not. Whether the U.S. should develop a code remains an open question, but one that can now move to more informed debate. Participants in the March 2012 New York roundtable agreed that there are now grounds to take that next exploratory step.
Ira Millstein
Senior Partner, Weil Gotshal & Manges LLP
May 2012
i. Background
The United States has had an unusual feature in an increasingly important area of corporate governance: it is almost alone among significant markets in having no single, authoritative national code of corporate governance serving as a generally-accepted benchmark of practices. To explore this phenomenon, the Millstein Center for Corporate Governance at the Yale School of Management founded the Governance Codes and Standards Program. It aims to encourage research into, and disseminate further knowledge of, international experience in the field of corporate governance codes and standards.
The first phase of the project, which is sponsored by the Millstein Center, Deloitte, PGGM, TIAA-CREF, Prudential Financial, and Microsoft, consists of (1) a call for papers by scholars on the general topic of governance standards; (2) two roundtables of both practitioners and academics focused on experience with codes; and (3) publication of one or more authored working papers on the topic.
The call for papers was issued in July 2011; out of the submissions,four academic papers were blindly selected by the scientific committee. The papers have been finalized and submitted to the Millstein Center.
The first roundtable was convened on October 13, 2011, in Zeist, the Netherlands at the headquarters of PGGM. The meeting brought together a select group of thought-leaderEuropean Union (EU) corporate directors, investors, regulators, code authors, and other experts to identify lessons to be learned from the European experience so far. Specific topics of discussion at the first roundtable included the impact of corporate governance codes on company performance; investor attitudes toward codes of corporate governance; and the role of codes of corporate governance in markets.
The second roundtable was held on March 29, 2012, in New York City. Topics for discussion at the second roundtable includedlessons learned from Europe; corporate board and investor relationships with codes of corporate governance; and whether paths might, or should, be found for developing a code of corporate governance in the U.S. The roundtable was attended by influential representatives of investing institutions and public corporations.
This working paper is organized into five main sections – (1) setting the stage for codes of corporate governance; (2) examining codes of corporate governance from an international perspective, including their history; (3) focusing on lessons learned from the first roundtable for the Codes and Standards Program held in Europe; (4) background on codes of corporate governance in the U.S.; and (5) Code project next steps.
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