ENFORCEMENT of corporate governance rules could also be achieved by relying on other parts of the legal system to which these would be linked. Several parts of the legal system could be involved.

Probably more significant case is the one in which the company’s articles of association refer to the code, whether to all provisions or only to some or more of its most significant obligations.

Articles may contain the obligation to institute an audit committee, or impose a separation of functions of chairman and CEO. In groups of companies, elaborate conflicts of interest clauses may be useful.

Cases have been known whereby the parent restricted the activity of its listed subsidiary, e.g. by forbidding it from taking advantage of corporate opportunities that the group would prefer to reserve to another group entity, raising interesting corporate opportunity issues.

By writing these rules into the articles, they become part of the contractual relation between a company and its board members, become legally relevant and hence allow enforcement through existing internal company rules. Enforcement would take place by a decision of the general meeting, whether by declaring directors liable, or by way of imposing specific performance. There is controversy to what extent that governance statement could influence the discharge of liability, that is voted upon at a annual general meeting.

As the codes often have been developed by business associations, one could imagine that the rules of the association allows enforcement to be organized by association of which the listed company is a member whether directly or through a participating business association. The members may explicitly endorse the code or be bound by a collective adhesion. It is however not clear how effective these membership techniques are.

If sanctions would be imposed, and disclosed, the member may suffer reputation damage: however, expelling an important but unwilling member is likely to do more harm to the association than to that member.

As an alternative enforcement technique one might consider a rule whereby the law would mandate the listed companies to include in their articles of association a reference to the applicable corporate governance code, including to its “comply or explain” feature. This technique could be compared with the German-Dutch approach whereby the law imposes the board to take a position as to the applicable code, and allow it not to comply provided it publishes an explanation. It would allow the company to mould its governance requirements to its individual needs, but then backed with the full authority of the general meeting.

Labour law may also offer a legal basis for certain corporate governance obligations: depending on law and traditions, board members are subject to labour law. Violations of essential provisions of good governance may be a reason for firing a manager.

Some code provisions could be incorporated by contract: clauses could relate to conflicts of interest, to corporate opportunities and non compete clauses, to the disclosure of certain remunerations e.g. before the person was hired, etc.

Here again, the effects of these clauses will have to be worked out on the basis of the applicable law.

A similar analysis can be made for corporate governance clauses in contracts in general: loan agreements can contain clauses on conflicts of interest or on corporate opportunities, or limit certain types of remuneration of executives. Again, enforcement will be a matter of performance of the contractual relationship and hence limited to contract parties.

Apart from non-performance of the contract, one may accept that the clause would entitle the creditor to claim performance, accelerate the loan, or require the company to withdraw decisions that violated a contractual corporate governance clause. If e.g. the company has paid the executives a remuneration that was higher than what the creditor has expressly forbidden, would this violation entitle him to claim repayment of the excess remuneration?

Market-led enforcement, along with a strengthening of company law mechanisms constitutes the best equilibrium for developing adaptive but nevertheless effective corporate governance practices.