Management-Based Corporate Regulation As a Force for Social Change

This paper examines the ‘comply or explain’ mechanism used by most corporate governance codes and treats it as a form of management-based regulation.  Most countries around the world now use the ‘comply or explain’ mechanism to encourage adoption of corporate governance practices seen to be beneficial to listed companies and their shareholders.  It is accepted that ‘one size will not fit all’ and hence corporate governance codes generally do not mandate actual adoption of practices, rather they mandate that companies disclose whether code recommendations have been adopted or not.  Over time the topics covered by corporate governance codes have expanded to include issues that might be seen to be more social than corporate in nature.  Initially most codes were aimed at restoring investor confidence through better board monitoring and accountability to shareholders.  More recently they have been extended to encourage disclosure regarding issues such as corporate responsibility and gender diversity.

This paper is based on the theory that regulation requiring corporate disclosures can have more than one purpose.  Not only is the disclosed information intended to enable better investment decision making and smooth running of capital markets but it can be a form of indirect regulation that changes the behaviour of corporations.  Indeed, as codes have extended their scope into social issues this purpose has become more evident.  This paper uses the example of gender diversity to explore the mechanisms through which corporate governance codes can cause this kind of organisational change.  It focuses on the effects that codes can have on internal management practices and the processes through which changes are implemented. It finds that well-designed corporate governance codes, if supported by broader institutional forces, can initiate cultural change within corporations and assist in the achievement of social goals.