Slovenian CG Code and its Ammendments: Are Slovenian Financial Markets Better Off?

Abstract

The article discusses Slovenian corporate governance practice in the prospect of the introduction and the further amendments of the Corporate Governance Code (Code) and its actual implementation in an environment otherwise characterized by big deficiencies in the enforcement of legal rules and poor functioning of the judiciary. Theoretically, when the institutions such as judiciary are not effective, any improvement in substantive law (law on books) makes very little sense. Hence, the financial markets are better off only to the extent that legal institutions became more effective and any improvement in the regulations produces no results when not accompanied by corresponding improvement in the enforcement of the legal rules. In this regard the article discusses the possible role of the Code as, to some extent, a substitute for inefficient legal institutions. The argument goes as follows. The markets should be to a certain extent capable to motivate the creation of separating equilibrium, namely separating “good” firms from “bad” firms. In this regard, the introduction of the non-mandatory Code of best governance practice should in our view provide the firms with a framework for signaling credible information about them and, consequently, allow the markets to differentiate between well and badly performing firms. As such, the Code potentially enhances the transparency and, consequently, the functioning of the capital markets without relying too much on the efficiency of legal institutions.