2.3.3 Developments in the concept of corporate governance

As stated above, corporate governance is influenced by a number of theories and a variety of disciplines such as law, finance, economics and management. During the development of the VOC or even since people began to organise themselves for a common purpose, corporate governance issues have been relevant. "How to ensure the power of organization is harnessed for the agreed purpose, rather than diverted to some other purpose, is a constant theme (Clarke 2004, p. 1). The concept of corporate governance made a name for itself in the last decades and has evolved rapidly since then. In response to corporate scandals (such as Enron, Ahold and Parmalat), a number of countries have attempted to draft regulations and/or legislation in order to prevent similar events from happening again, to regain the trust of shareholders and to encourage good corporate governance within companies (Monks and Minow 2004, p. 14). Corporate governance codes, legislation and rules have been flourishing in the last decades.1 Moreover, existing regulation and supervision systems set up to control agents have been examined and if necessary revised.

Besides growth in corporate governance related legislation, specific corporate governance codes and guidelines blossomed. They were drafted by a variety of bodies and committees, often appointed by government departments and included among others prominent academics, businessmen and representatives from investor groups (Mallin 2010, p. 25). This trend already started in the late seventies with a US code, named The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation and in 1989 inHong Kong with the Code of Best Practice, Listing Rules (Aguilera and Cuervo-Cazurra 2004, p. 418). The emergence of corporate governance codes across countries did not follow a linear path. After the UK Cadbury Report in 1992, an exponential rise in the emergence of codes was visible (Aguilera and Cuervo-Cazurra 2004, p. 419). The Cadbury Report served as a 'model code' that largely influenced the development and contents of others. In May 1991 the Committee on the Financial Aspects of Corporate Governance was established. The committee was chaired by the industrialist Sir Adrian Cadbury. In December 1991 the committee presented its report on the Financial Aspects of Corporate Governance which became widely known as the 'Cadbury Report'. The Cadbury Report contains a code of best practices designed to achieve the necessary high standards of corporate behaviour and focuses on the control and reporting functions of the board, the role of the auditors and shareholders. The code is applicable to all listed companies registered in the UK. These companies have to state whether they are complying with the code and must give reasons for areas of non-compliance (Cadbury Report 1992, I.1 ), which concerns the comply or explain principle that will be reviewed in more detail below.

In addition to national initiatives for corporate governance codes and guidelines such as in the UK, international initiatives were taken as well. In 1999 the Organisation for Economic Co-operation and Development (the OECD) presented its OECD Principles of Corporate Governance, which were reviewed and revised in 2004. The OECD states that no single model of good corporate governance exists but it has identified some universal common elements that underlie good corporate governance. These elements are laid down in nonbinding principles which are not intended to be detailed prescriptions for national legislation, but have been incorporated into codes in many countries (OECD Principles 2004, p. 13). Other international organisations also became involved in the corporate governance discussion (for example the World Bank, the Global Corporate Governance Forum and the Commonwealth Association for Corporate Governance) or issued corporate governance principles (the International Corporate Governance Network). The European Union also focused its attention on the discussion and established the EU High Level Group of Company Law Experts and launched the EU Action Plan on Modernising Company Law and Enhancing Corporate Governance in the EU. Furthermore, it established the former European Corporate Governance Forum (see section 1.2.1 on the drivers for EU corporate governance) and in June 2006 published Directive 2006/46/EC imposing national corporate governance codes and the comply or explain principle (see section 1.2.2).

The US responded totally differently to the financial scandals by creating the Accounting Industry Reform Act 2002, known as the Sarbanes-Oxley Act. Contrary to the codes in Europe which embodied soft regulation and principles, recommendations and best practices, the US opted for very strict and detailed regulation, being the Sarbanes-Oxley Act. The Sarbanes-Oxley Act had a large impact on the further evolution of corporate governance: it influenced other corporate regulation across the world, because of its progressive and very detailed regulation. Besides its positive influence, there were also many objections due to the high implementation costs, the harsh regulation and the fact the Sarbanes-Oxley Act also applies to non-US firms listed in the US (Romano 2005, p. 1604) (Ribstein 2005, p. 377).

The drivers behind the EU corporate governance developments (as described in section 1.2.1), and hence subsequently the current EU corporate governance framework which is still evolving, are due to the theoretical framework described here. Codes and regulations are reviewed and revised and in a number of countries and in certain business sectors codes and regulation continue to blossom. Over the years specific corporate governance issues have been spotlighted, from fraud in annual reports, to board remuneration, shareholder's influence and rights, board's independence and more recently board diversity and corporate social responsibility. In this respect the coherence of the theories underlying corporate governance is of importance as well. As stated in section 2.3.1 this variable coherence between the theories underlying the concept of corporate governance not only influences the concept itself but simultaneously the contents of national corporate governance codes and their application in practice.2 The sources of influence for the draughtsman of the national corporate governance codes have evolved over time, synchronically with the concept of corporate governance itself. For example, in short, taking the Dutch Corporate Governance Code into perspective, the 2003 code emphasises creating long-term shareholder value (enlightened stakeholder theory) and states that the interests of the different stakeholders should be taken into account (stakeholder theory) (Dutch Corporate Governance 2003, Preamble 3). Moreover, the Dutch corporate governance committee states that the code principles (and thus the best practices) reflect the latest general views on good corporate governance (Dutch Corporate Governance 2003, Preamble 4). In the words of Memelink, corporate governance codes have a 'living character' (Memelink 2010, p. 43). Hence, the 2008 Dutch Corporate Governance Code emphasises that next to the interests of different stakeholders corporate social responsibility issues relevant to the enterprise should be taken into account as well (Dutch Corporate Governance 2008, Preamble 8) (Memelink 2010, p. 44). Moreover, the 2008 Code emphasises the agency problems between on the one hand the management and the supervisory board and on the other hand the shareholders due to tensions especially pronounced in takeover situations (agency theory) (Dutch Corporate Governance 2008, Preamble 10).

To complete the theoretical framework (see V in figure 2.1a) and as a prologue to the next chapter that discusses the comply or explain principle more specifically, in section 2.4 the theories clarifying the comply or explain principle are examined further.