Corporate Governance Soft Law Regulations from a Social Norm Perspective

Abstract

Purpose: This study applies the concept of social norm dynamics to explain how corporate governance soft law is enforced. Design/methodology/approach: Using data of German listed stock companies and of economic media coverage between 2001 and 2010, we observe the complex relationship between sanctions and behavior in the social context of corporate governance soft law. Findings: We find that the public discussion of normative demands related to corporate governance issues increases if firms do not comply with the German Corporate Governance Code. We show that groups of actors, such as DAX companies, represent the addressees of normative demands, i.e., targets of expectations about what is appropriate and what is not. We also find that normative demands tend to be personalized, as public discussion is greater when initiated by a specific individual or firm. Finally, we demonstrate that social control in terms of public sanctioning positively influences a firm’s compliance with the soft law, whereby negative statements (disapproval) outweigh the effects of positive statements (approval). Originality/ value: We corroborate the social character of normative demands in the context of corporate governance soft law, and contribute to a better understanding of why soft law can work despite its having no legally binding force. The results of our study suggest that sanction mechanisms in the context of social norms underpin the strength of soft law as an alternative to, or extension of, hard law.