Comply or Explain? Investor Protection Through Corporate Governance Codes

Abstract

As a consequence of the financial crisis, the effectiveness of self-regulation has been increasingly questioned. In particular, self-regulatory initiatives on corporate governance have been often put under scrutiny so as to assess whether, by favouring the actual adoption of best practices, these codes are really effective in prompting better governance. Looking at one of the most important features of the Code, this paper tries to address this issue by building up an indicator (so-called CoRe) that assesses the actual level of compliance for Italian listed companies. We find that actual compliance, as measured by the CoRe indicator, is much lower than formal compliance, as declared by issuers. A second finding is that actual compliance is driven by some key aspects of firms’ governance. The CoRe indicator is systematically higher in firms in which: i) minority shareholders have appointed one or more directors; ii) independent directors are organized in a committee; iii) institutional investors, especially if foreign, participate to GMs; iv) normative control enhancing mechanisms are adopted, v) there is no separation between ownership and control by means of pyramids.