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LAWS 8024

NOTES AND QUERIES


Readings for Week 7
Governance through Codes, Securities Markets & Gate-Keepers
The readings for this week focus on the place of soft regulation within the
corporate governance framework, particularly how it modifies corporate behaviours.
These soft regulations include best practice codes, principles, listing rules and all
other regulations besides the classic statutory laws. These soft regulations are not
made by parliament, the constitutionally recognized law making organ of
government, but by industry insiders, professionals and gatekeepers of the
industry.
A theoretical model upon which soft regulation is based is as espoused by Julia
Black.1 Decentering tries to emphasize the de-apexing of the state: moving from
a hierarchical relationship of state state-society to a heterarchical one which is, in
fact, horizontal. One reason for decentering regulation is due to the fragmentation
of knowledge. Black claims that because of the information asymmetry between
the regulator and the regulated, the government cannot know as much about
industry as industry does about itself.2
She proposes self regulation as a solution to this problem. This is because
governments could never govern if people were not governing. The place of
government in a decentred framework is that of a stakeholder. It should never be
involved directly but only indirectly, for reasons of public policy. It can create the
conditions in which firms, markets e.t.c steer themselves in the direction the
government desires.
Dimity Kingsford Smith engages in an analysis of the nature and effect of soft
regulation within the corporate governance framework. She does this by looking at
the interrelation between soft regulation and state law but concentrates on the
regulations of the stock exchange as a bench mark.
Her analysis reveals that the strengths of soft regulation shine through in a system
of legal pluralism. She contends that when combined with formal legal and non
legal orders, soft regulation have an extended effect of behavior modification. This
is because its indirect and informal nature lowers organizational resistance to it, it
detailed specification encourages participation and its fluidity allows it to flow over
from group companies to their subsidiaries.
1 Julia Black, Decentring Regulation: Understanding the Role Self-Regulation in a
Post- Regulatory World (2001) 54 Current Legal Problems 103.
2 Ibid 107

LAWS 8024
Du Plessis on the other hand sees an increased shift towards substantive regulation
of corporate governance. He wonders whether the benefits of increased substantive
corporate governance mandates outweigh the costs of compliance. He further asks
whether the overriding objective of present corporate governance regulation in
Australia was aimed at conformance as opposed to performance. He posits that
the solution to inefficacy will be to convert relevant mandatory principles to
replaceable rules.
Marc Moore takes a look at the light touch approach of UK soft regulations. He
decries the increasing prescriptiveness of the UK Combined Code and its
susceptibility to formulaic and legalistic interpretation by both financial market and
corporate actors. He states that the juridification of codes & principles was
tampering with the flexibility of the code and emphasizing form over substance. The
comply or explain requirement, he posits, is meant to allow the board and
management ponder over issues of corporate before giving reasons for not
complying, since good governance can be achieved by other means.
Moore focuses more on financial institutions than on companies that have to deal
with consumers. He concludes that corporate governance is ultimately about what
investors think of the corporate governance practice of an institution and not just
about the legal framework of corporate governance.
Black also does admit that there are certain difficulties with setting up a truly
horizontal relationship between the government and others. One is the fact that
states will always have the monopoly on legitimate use of force and authority to
make binding law. There is always the potential that the powers will be used. A
second is the fact that it is expected of democratic governments, as guardians of
the public interest, to actually resolve collective problems. States cannot shirk and
pass on their responsibilities to private networks.
John Coffee points out the dangers of leaving the gate keeping functions in the
hands of private firms. He highlights the conflict between maintenance of
reputational capital and the desire to please clients. He gives some anecdotal
evidence but ultimately shows that certain events like the legal reforms of the
1990s and the economic bubble can cause the economic position of the
gatekeeper to become increasingly dependent on favouring the interests of
persons outside their profession. In the end, he concludes that reputational
character is not an asset and gate keepers may not work hard to protect it when
the benefits of acquiescence outweighs the risk of liability.

LAWS 8024

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