Transition Economies and Corporate Governance Codes: Can Self-Regulation of Corporate Governance Really Work?

Abstract

This article evaluates the contribution that corporate governance codes can potentially make to corporate governance practices and capital market development in transition economies. It highlights the fact that voluntary codes of a self-regulatory nature will not have a major impact in transition economies with corporate environment dominated by strong block-holders and weak culture of compliance. They fail to satisfactorily regulate entrenched block-holders which are at the centre of corporate governance reform. Moreover, voluntary compliance with code provisions is poor, as domestic investors do not place much importance on good corporate governance practices when creating a demand for company's shares. Finally, market mechanisms of control are not yet sufficiently developed to support the compliance with self-regulatory norms. This article therefore suggests that in transition economies the desirable mix of interactive components of corporate governance framework tends to be in favour of legislation and regulation, rather than self-regulatory and voluntary corporate arrangements.