*2.1. Corporate Governance Code in the View of Theory*

The existing literature analyzes corporate governance from the perspective of inherent conflicts which exist in the organization context and are explained by agency theory (Fama and Jensen 1983; Shleifer and Vishny 1997). According to agency theory, the conflict between shareholders and managers arises from the separation of ownership and control (Jensen and Meckling 1976), observed predominantly in the context of dispersed ownership structure. The principal–agent conflict, known as the agency conflict of type I, refers to information asymmetry and differences in time horizon and risk diversification opportunities, which characterize the relation between shareholders and managers (Jensen and Meckling 1976). The theory explains that managers may have the tendency of maximizing their own wealth, acting at the cost of shareholders (Fama and Jensen 1983; Shleifer and Vishny 1997).

Given that dispersed ownership, which offers an ideal environment for the emergence of principal–agent conflict, remains in a global context more the exception than the rule (La Porta et al. 1999) more interest in corporate governance studies has been devoted to concentrated ownership (Su et al. 2008; Loyola and Portila 2019). While concentrated ownership provides a natural mechanism for mitigating principal–agent conflict (Coffee 1999; Berglöf and Claessens 2006), it leads to the emergence of the agency conflict type II, which refers to the relations between majority and minority shareholders (Wang and Shailer 2015; Edmans 2014; Khan et al. 2020). Principal–principal conflicts materialize in the majority shareholders' actions related to investment and dividend policy, in order to enjoy private benefits (Gilson and Schwartz 2013) and to extract value from the company at the expense of minority investors (Krivogorsky and Burton 2012; Wang and Shailer 2015). In addition, majority investors tend to appoint their own representatives to the board to limit the access to information and decision-making for minority investors (Shleifer and Vishny 1997).

Agency conflicts are inherent in organizations and remain naturally linked tomore complex ownership structures characterized by the presence of shareholders who differ in terms of their type (industry, family, and financial), as well as the size and the time horizon of their investment (Hamadi and Heinen 2015). In reaction to these conflicts, corporate governance offers a set of mechanisms and institutions for reducing potential problems by aligning the interests of managers with the interests of shareholders and by aligning interests of majority and minority shareholders. This alignment can be exerted with monitoring and incentive schemes. Monitoring exercised by internal forces, such as ownership, board

composition, and structure, and by external mechanisms, including markets for corporate control, competitive labor markets, shareholder activism, rating agencies, and media (Aguilera et al. 2015; Elgharbawy and Abdel-Kader 2016) is expected to reduce agency conflicts. Despite ongoing efforts to formulate and enforce principles, "effective corporate governance still remains a puzzle for practice and research" (Fotaki et al. 2019, p. 1).

Best practice codes offer corporate governance principles on oversight and control over the firm (Cuervo 2002; Aguilera and Cuervo-Cazura 2004; Chizema 2008; Tricker 2012). The best practice concept assumes voluntary adoption according to the comply or explain rule, providing flexibility in terms of scope and pace for implementing code recommendations (Tan 2018). It is viewed an example of self-regulation of listed companies (Hooghiemstra and van Ees 2011). The codes address selected dimensions of corporate governance, such as functioning of the board, shareholder rights, transparency, auditing, and remuneration (OECD 2015), and they are designed to provide principles and norms for creating shareholder value (Mallin 2004). The codes offer widely recognized and accepted guidelines for addressing governance inefficiencies (Lipman 2007; Arcot et al. 2010; Tricker 2012) and are often inspired by international organizations, such as the OECD, or regulatory and supervision authorities, such as the European Commission (e.g., the European Commission Communication 284 to the European Council and the European Parliament) or the US Securities and Exchange Commission.

In the conceptual framework of agency theory, the adoption of code provisions is expected to mitigate information asymmetry and reduce conflicts between shareholders and managers. Increasing disclosure and addressing the problems of hidden action, hidden information, and hidden intention compliance lower investment risk and enhance investor trust (Durnev and Kim 2005; (Mazotta and Veltri 2014; Kaspereit et al. 2017). In the context of ownership concentration, majority shareholders may be motivated for compliance by the assumption that their interests are "interchangeably merged with the interests of the corporate entity and whatever is good for the society must be good for the corporation in the long run" (Pritchett 1983, p. 997). This resonates in the commitment to adopt the rules of fairness, an ethical stance which is in the best interests of the company. Blockholders may decide to voluntarily constrain themselves in exerting their power over the company and by their willingness to share "control of control" (Perezts and Picard 2015), driven by the notion that "corporate actions are related to long run corporate benefit and there is no taint of self-dealing or conflict of interests" (Pritchett 1983, p. 997).

Implementing the code is driven by numerous reasons. Firstly, the idea of self-regulation and "soft law" provided by the code assumes that the market monitors compliance. This means that investors express their acceptance of conformity with the code via increasing their holdings of a company's shares, leading to an increase of company value (Gompers et al. 2003; Black et al. 2006; Goncharov et al. 2006; Renders et al. 2010). Consequently, investors penalize non-complying companies through selling their shares (Easterbrook and Fischel 1996).

Secondly, the code principles are formulated according to the needs and interests of institutional investors, for whom high conformity translates into high trust towards the company management (Arcot et al. 2010). Compliance with internationally recognized and easily comparable standards increases transparency and lowers the risk associated with firm operation (Bistrowa and Lace 2012). In a sense, greater compliance is understood as higher protection of shareholder interest.

Thirdly, corporate governance conformity not only aims to develop efficient monitoring and oversight to protect shareholder value, but also aims to legitimize the presence of the firm on the stock market. Competition between companies to attract investors and raise funds for growth generates coercive or normative imitation (Guler et al. 2002). According to the legitimization perspective, companies implement new practices in order to enjoy the benefits of meeting social expectations. "If practices become institutionalized, their adoption brings legitimization to the adopting organization or social system" (Aguilera and Cuervo-Cazura 2004, p. 422). Firms are differently motivated to comply with best practice, and such conformity does not necessarily result in greater efficiency or effectiveness. The declaration of conformity issued by listed companies may either fail to lead to better performance or

higher firm value, or else it may not necessarily be motivated by the strategy of increasing shareholder value. Instead, compliance may be a product of the endogenously determined structure of internal firm governance or result from isomorphic dynamics driven by the firm's legitimization policy (Hermalin and Weisbach 2003).

In sum, according to agency theory, firms operate in an economically rational way and search for practices and organizational solutions that improve performance with respect to resources utilized and effectiveness (Williamson 1981). Thus, the decisions on corporate governance compliance and the implementation of best practice are undertaken for the purpose of obtaining efficiency gains (Aguilera and Cuervo-Cazura 2004). The process of innovation diffusion introduces new solutions, improves company performance, and is driven by technical and rational needs (Zattoni and Cuomo 2008). It is motivated by rational arguments and is expected to improve company efficiency. Thus, well-performing companies which previously met shareholder expectations with respect to financial results, share price, and company value are more responsive to formal requirements and shareholder expectations with respect to the board's functioning, structure, and composition, as well as transparency standards and remuneration policy. Compliance with the code recommendations constitutes a signal for investors that the firm, its executives, and board directors aim at protecting shareholder interests and endeavor to enhance shareholder value (Hermes et al. 2007).
