3.2.2 The legal qualifications more specifically

Before continuing to examine what kind of rules corporate governance codes and the comply or explain principle involve, it is first reviewed whether and under which conditions they can be considered to be law. To explain this, the Dutch situation is used as an example, however the conclusions are general. Timmerman mentioned in 2004 that the code's practice and the shareholders' involvement are that relevant that one does not get to the exact legal definition of the code (Timmerman 2004). Legal doctrine, however, decided otherwise and tried in vain to reach consensus on the legal status of corporate governance codes.

Rules of law (rechtsregels) are abstract and general rules on how to behave, aimed at anyone in a specific situation, as acknowledged and applied by organs or officials such as civil servants and magistrates. The rules as laid down in corporate governance codes (for example in principles and best practice provisions) are abstract and general rules aimed at anyone in a specific situation (listed companies). So far, corporate governance codes can be qualified as law. What about the acknowledgement and application by organs or officials? Do magistrates or other civil servants acknowledge these codes as law? Do they apply them as such? In the Netherlands the Supreme Court HBG case, the Supreme Court ABN AMRO case and Schouten's publication at first sight give some clarification thereof. The Dutch Supreme Court and its Solicitor General conclude in the HBG case that: "neither in the current regulation nor in the published proposals for modification or understanding of corporate governance as accepted in the Netherlands is it possible to find enough support for the rule of law (rechtsregel) accepted by the Corporate Court' (HR 21 February 2003, NJ 2003/182, consideration 6.4.2). Consideration 4.4 of the ABN AMRO case states that: "For any other view there is insufficient support in the law and in general prevailing beliefin the Netherlands as reflected inter alia in the Dutch corporate governance code"(HR 13 July 2007, NJ 2007/434, consideration 4.4). Schouten concludes from these considerations that the understanding of corporate governance as accepted in the Netherlands proves to be a legal source that establishes new rules of law (rechtsregels) (Schouten 2004, p. 143). As such it is required that the acceptance of this new law may not present such obstacles that the absence of legislation or a statutory rule possibly results in legal insecurity (Schouten 2004, p. 143). To summarise Schouten, to become law whilst being a rule in a corporate governance code in the Netherlands:

Whether this is the case has to be reviewed separately for each specific rule in the corporate governance code. A possible distinction can be made between the best practices and principles in the Dutch corporate governance code. According to its preamble 4: "the principles may be regarded as reflecting the latest general views on corporate governance, which now enjoy wide support "(Dutch corporate governance code, 2008). Therefore, it is more likely for principles to become law than for best practice provisions, since they are already generally accepted as such. A possible other differentiation exists between rules as laid down in codes that are in line with applicable legislation, contrary to applicable legislation, or can be seen as totally new law (Schouten 2004, p. 143). According to Schouten code rules contrary to applicable legislation are not law, unless they gain weight in future and lead to modifications of the existing legislation (Schouten 2004, p. 143). This is in line with the thoughts of Franken as given above, who states that if a rule comes from one of the five legal sources (here: legislation) it apparently can be considered law (Franken 2003, p. 102). In the Versatel case further elaborated on in section 4.6.7, the corporate court decided that non-compliance with a best practice provision regarding the supervisory board was not allowed in that specific situation (OK 14 December 2005, JOR 2006/7). The corporate court gave a temporary measure of order to the management and supervisory board not to change compliance with the specific best practice provision into non-compliance which was confirmed by the Dutch Supreme Court (HR 14 September 2007, NJ 2007/612). The annotator Maeijer concluded that this decision was a bit too far-reaching: although concerning a temporary measure of order, in this case the legal force of the Dutch corporate governance code was on a par with legislation and articles of association (HR 14 September 2007, NJ 2007/612).

Memelink is cautious as well and argues that the code reflects the latest general views on corporate governance and in time can become law based on custom when there is a standing behavioural line (usus) that is considered to be a legal duty (ideëel moment - opinio necessitatis) (Memelink 2010, p. 45). He claims that the code is currently legally relevant but has not yet evolved into legal norms (rechtsnormen), which is again contradicted by Berendsen and Van Thiel (Memelink 2010, p. 47) (Berendsen and Van Thiel 2007). The legal embedding of the Dutch corporate governance code did not result in a legal norm but in reporting obligations, claims Memelink (Memelink 2010, p. 46). De Bie Leuveling Tjeenk states that the Dutch Supreme Court confirms that the code is a legal source that helps to decide upon the open standards of art. 2:8 and 9 BW (De Bie Leuveling Tjeenk 2011, p. 218). He moreover claims that no court case exists in which a legal rule was deduced from the code not to be found otherwise (De Bie Leuveling Tjeenk 2011, p. 230).

In 2004, Bartman called the Dutch corporate governance code a 'legal lightweight' since there is neither contractual legal binding nor a law creating authority by its issuers. When the Dutch code was legally embedded in 2004 (see section 4.6.4) the Minister of Justice stated that: "a code is not there to answer questions of law or to design law, but to provide guidance for management board members, supervisory board members and shareholders" (Staatsblad 2004 747, p. 4). The Dutch corporate governance code is a behavioural code and not primarily drafted as a document with legal effect (Bartman 2004, p. 126). As agreed with in the underlying study and since the code involves self-regulation, the social-economical binding is far more relevant than the legal, Bartman claims (Bartman 2004). Generally phrased, regulation in codes can be considered law whenever these rules are in line with applicable legislation or derivable from legal sources (legislation, custom, jurisprudence, treaty and legal principles). Whether this is the case differs per country, code and code provision and is to be decided upon in specific cases by the courts.

Far more relevant to actual practice is the character of codes and the comply or explain principle as regulation, more specifically the judicial corporate governance arrangements as discussed further below. A code cannot be seen as a classical legal instrument such as legislation (e.g. the Dutch civil code) is.

Corporate Governance is a dynamic area and it is therefore believed that classic legal instruments such as legislation are not as effective as codes (Voogsgeerd 2006, p. 1). Codes are more flexible than legislation and responded to the needs of the corporate world after the financial scandals. They move with the economical and social developments and can, according to Memelink, be seen as 'living documents' (Memelink 2010, p. 43). In some countries the national corporate governance codes can even be regarded as marketing instruments to inform and attract (foreign) investors with. When considering whether corporate governance codes (and subsequently the comply or explain principle) can be qualified as new market instruments/classic legal instruments/otherwise, one first has to examine the meaning of three important and coherent terms: (i) codes, (ii) new judicial arrangements and (iii) accountability (see figure 3.2.2).

In general the comply or explain principle is laid down in corporate governance codes. Yet, what are codes? According to Galle they are a form of self-regulation and a distinction can be made between the term 'code' and 'behavioural code' (Galle 2000, p. 51) (Voogsgeerd 2006, p. 10). 'Behavioural codes' are not legislation and are not enforceable by law. They can be considered behavioural rules within a company or organisation derived from already existing ethical norms and values. 'Codes' are a collection of norms and values as well, although more specific, according to Galle. Although not legislation either, they can gain a kind of legal status and have a certain general weight (algemene gelding) (Galle 2000, p. 51). Both codes and behavioural codes have a civil origin, meaning that these norms are drafted by others (for example organisations, companies, specially established committees) than the government or government-related organisations. Voogsgeerd remarks that the contents of behavioural codes and codes can be quite the same (Voogsgeerd 2006, p. 10). A behavioural code can transform into a code with a legal status. Not being able to give a sound definition for behavioural codes and codes is neither surprising nor a necessity, since they are and should be hybrid concepts to be able to capture the dynamic collection of norms and values of corporate governance; likewise a legal qualification also proved to be difficult (see above).

Voogsgeerd puts a new term into words which is of importance in this study: new judicial arrangement. A new judicial arrangement can be described as 'code+' (code plus). This is the code itself as an instrument, but also the environment in which it functions, the actors involved and their balance of powers - its context so to say (Voogsgeerd 2006, p. 13). The classical judicial arrangement is legislation issued by the government. As stated above, this is not a suitable instrument for corporate governance issues since legislation is quite inflexible and corporate governance is a matter for the companies themselves. Therefore, the choice of self-regulation such as a code is quite obvious. In short, four important reasons to opt for self-regulation existed: (i) the increasing consciousness regarding the moral duties of a company, (ii) stakeholders such as shareholders and employees extracted self-regulation from companies, (iii) the government withdrew itself more and more from some areas and (iv) politics stated that some issues do indeed need regulation, however not regulation drafted by the government (Galle 2000, p. 48). Next to pure self-regulation other important judicial arrangements regarding corporate governance regulation evolved as well (Voogsgeerd 2006, p. 21) (Wymeersch 2005) (Van den Berghe and De Ridder 1999, p. 54) (see figure 3.2.2a). Since in the underlying study they concern corporate governance in particular, the arrangements are hereby renamed into judicial corporate governance arrangements:

According to Wymeersch in the case of pure self-regulation (A): "the implementation of codes is voluntary and based on selfproclamation while its enforcement is based on the assessment by market forces" (Wymeersch 2005, p. 2). The codes and comply or explain statements: "express the awareness of their draftsman that financial markets attach increasing importance to corporate governance as a central touchstone in the evaluation ofgood management and hence ofthe company" (Wymeersch 2005, p. 4). The enforcement is put in the hands of the corporate bodies themselves and of the market forces. Wymeersch believes that in B (self-regulation supported by non-statutory norms) self-regulation does not really apply. Codes take the form of a stock exchange recommendation or become part of the listing agreement or are a condition thereto. The self-regulation is supported by norms or regulation, not being formal legislation: for example the legitimacy of the code and the fact that companies have to comply with or explain the specific code are laid down in the listing rules. Arrangement B can be regarded as strengthened self-regulation supported by non-statutory norms. In the event of arrangement C (self-regulation facilitated by statutory rules), a group or committee set up by one or more private bodies and with the support of the authorities drafts the code and national legislation makes a reference to this code. The code has found a legal base in national legislation and as a consequence has, whilst being self-regulation, a kind of hybrid form (Wymeersch 2005, p. 3). Voogsgeerd states that in arrangement D (regulation of the self-regulation) legislation has no longer a supporting or facilitating function such as in C. In D the self-regulation is 'regulated' for instance as a result of low compliance with previous pure self-regulation and then an intervention by the legislator. This 'regulating of self-regulation' is also named meta-regulation. And finally, E (pure regulation) implies formally laying down fully-detailed corporate governance rules in legislation itself, of which the Sarbanes-Oxley Act is the ultimate example (Wymeersch 2005, p. 3). To summarise, these new judicial corporate governance arrangements can be described as codes+ (codes and their context) and are to be subdivided in five different judicial arrangements (from pure self-regulation to pure regulation). The five judicial arrangements of corporate governance arrangements will be discussed in more detail when the countries under review are examined in the chapters below.

The third term to be discussed is accountability (verantwoording). A code should (if properly used in a new judicial corporate governance arrangement) result in accountability: efficient accountability by management regarding their actions towards the stakeholders and society as a whole. Accountability concerns disclosure and as stated above (section 2.4) disclosure is related to legitimacy: legitimating the actions of management, the existence of companies but also the codes themselves (Voogsgeerd 2006, p. 25). The generally accepted manner of providing accountability regarding compliance with codes is by means of the corporate governance statement in the annual report and the comply or explain principle. Besides the fact that the comply or explain principle is perfectly explainable by the legitimacy theory and the concept of market failure (see section 2.4), it is also a solution to make accountability possible within the new judicial corporate governance arrangements as established after the corporate scandals.

Taking the three concepts (codes, new judicial arrangements and accountability) explained above into consideration, the corporate governance codes (including the environment in which it functions and the actors involved) can be considered not only a new set of norms and values laid down in rules, but also a new judicial corporate governance arrangement that is strengthened by the accountability managers have to give to stakeholders by means of the comply or explain principle, which is also part of this new judicial corporate governance arrangement. In section 3.2.1 general considerations are given on how to qualify rules and regulation. The features of law are discussed, as well as the five formal legal sources. In section 3.2.2 the qualification of corporate governance codes is reviewed. Generally phrased, regulation in codes can be considered to be law whenever these rules are in line with applicable legislation or derivable from legal sources (legislation, custom, jurisprudence, treaty and legal principles). Whether this is the case differs per country, code and code provision and is to be decided upon in specific cases by the courts. No consensus exists in legal doctrine exists and far more relevant to actual practice is the character of codes and the comply or explain principle; the five judicial corporate governance arrangements as discussed above. Qualifications per country and more specifics (especially on the comply or explain principle) will be provided in the relevant chapters and somewhat anticipatory in the next section.