Is Europeanization Though Soft-Law a Reality in Corporate Governance Policies?

Can non-binding EU soft law approaches to policymaking really deliver domestic policy change and convergence in member states’ policies, without the imperative of having to enact legally binding commitments? We analyse this question by looking at changes in EU member states’ corporate governance codes since 1992. We conclude that the soft law approach has delivered not just policy change, but policy convergence.

Europeanization addresses the impacts of EU membership on national politics and policies, via both the processes by which EU decision-making manifests itself at the national level; and the outcomes of that EU decision-making. Over time, as EU membership and policy scope have expanded, new approaches to policy-making have been developed and, therefore, new channels created by which Europeanization can occur. One such has been the use of ‘soft law’ processes. These have allowed for greater discussion of ‘sensitive’ policy issues, where national policy sovereignty continues to dominate, given that these discussions do not result in legal texts binding on the member states. That said, the purpose of soft law is still to deliver national policy change. Which begs the question – can they work?

Our research, forthcoming in the Journal of Common Market Studies (and available here) seeks to explore this under-researched area by addressing a number of conceptual issues via a study of the impact of the soft law corporate governance elements of the European Commission’s 2003 Communication ‘Modernising company law and enhancing corporate governance in the European Union – A Plan to Move Forward’. Specifically, we analyse whether member states’ corporate governance codes have converged towards the 26 priorities for corporate governance identified in the 2003 Communication. This is important, given that an explicit goal in the Communication was ‘co-ordinating corporate governance efforts of member states’.

We create a dataset from a detailed textual analysis of 95 national corporate governance codes issued over the period 1992-2010. For our key terms, we take those 26 corporate governance priorities. We then identify in which of the national documents they appear. We employ a range of statistical and econometric tests to determine the extent of convergence. Our analysis suggests that the Action Plan did indeed influence national policy-making, but that the degree of national policy alignment depends on when each national corporate governance code was issued, where, and by whom.

Our primary finding of convergence confirms the potential of the soft law approach to deliver national policy change. It is also important because most of the existing literature focuses on convergence per se. By finding convergence towards a set of EU policy priorities that, by definition, did not simply reflect existing corporate governance codes, our results also confirm Europeanization.

Second, we find that codes issued by national government commissions showed greater alignment with the 26 priorities than those issued by industry associations or national stock exchanges. Third, different patterns of convergence emerge when member states are split into ‘old’ (EU15) and ‘new’ (EU12) member states. New member states’ initial codes tended to be more closely aligned with the 26priorities – even when their first codes were issued prior to 2003. This suggests that there was policy learning from the old member states, as they prepared for EU accession. This also represents an important channel of Europeanization – that countries preparing to join the EU are already engaged in this process. A corollary to this is that there was greater convergence in the old member states’ corporate governance codes after 2003. We also find some evidence, at the end of our dataset, that the global economic crisis triggered a further round of policy convergence.

This study shows how member states are developing their corporate governance regimes. We hope it helps to deepen our understanding of the processes, outcomes, and channels of Europeanization; we would also like this study to stimulate further research into the operation and policy impacts of soft-law processes in the EU.

Idoya Ferrero-Ferrero is an Assistant Lecturer of Finance and Accounting at Universitat Jaume I, and Robert Ackrill is Professor of European Economics and Policy at Nottingham Business School, Nottingham Trent University.