Best Practice in Practice: The Case of the Corporate Governance Code at the Warsaw Stock Exchange

IntroductionCorporate governance codes of best practice provide sets of internationally recognized recommendations guiding the practice of shareholders, the board, firm internal organization (audit, risk management, motivation and incentive schemes) and its relations with various stakeholders and institutions (OECD, 2004, 2015; Lipman, 2007). These recommendations are viewed as the selfregulation of listed companies in response to management and supervision inefficiencies. The formulation and adoption of corporate governance guidelines are usually inspired and supported by active institutional investors, who characterized by significant mobility and substantial funds search for the investment opportunities of the highest return at the level of acceptable risk (Mallin, 2004; Tricker, 2012). The company's declaration of compliance with the best practice serves as a mechanism enhancing image and reputation, assuring for more efficient governance and providing higher return to shareholders. Recent years showed the development of best practice codes addressing corporate governance failures and shortcomings identified in the course of corporate scandals and the consequences of the financial crisis (Clarke and Chanlat, 2009). In particular, a series of studies and reports link the inefficient corporate governance, mostly the remuneration policy, the quality of board monitoring and the scope of disclosure to the outbreak of the financial crisis (Kirkpatrick, 2009; Isaksson, 2009). Resulting from corporate failures and scandals, new recommendations call for stronger transparency standards, empowerment of shareholders, efficient board work, stronger board independence and responsibility of executive compensation, involvement of females in governance and management (Kirkpatrick, 2009; Isaksson, 2009). The issuance of the codes signals that the expectations of shareholders with respect to companies' practices are met. This is believed to mitigate serious inefficiencies and shortcomings. It also is viewed as the process of lowering risk on the stock market and restoring confidence amongst its participants.The codes of corporate governance are the tools for transmitting standards and norms to the large population of listed companies. This issue is particularly important for transition and emerging markets which are characterized by weak institutional order and ineffective legal system (Cuervo, 2002; Hermes et al., 2007; Aluchna, 2009). As the codes improve the quality of corporate governance, and companies and shareholders observe positive results of the compliance in developed economies, the effect should be even stronger for developing or emerging markets (Aguilera and Cuervo-Cazurra, 2004. The conformity with the code may also change the practice of listed firms, strengthen governance structures, and speed up the implementation of regulation and new laws. Consequently, it may improve the country's reputation of the global stock market increasing valuations and attracting investors (IFC, 2006). Therefore, the adoption of corporate governance may reinforce the process of institutional transition and enhance social and economic development.The chapter presents the evolution path of corporate governance code at the Warsaw Stock Exchange tracing the milestones of the best practice guidelines. We carry out the analysis of the development of the best practice code since 2002 within the framework of transition reforms undertaken in 1989, the rise of the emerging market and the harmonization within the European Union structures after the 2004 accession. More precisely, this chapter identifies the dynamics of implementation of the best practice code and indicates main drives for the development of its content. It also addresses the question of the 'practice of best practice' which is the formal compliance with the code. Using the unique sample of 100 listed firms over the years 2008-2014, we analyze the dynamics of corporate governance compliance at the Warsaw Stock Exchange. …