Part A - Governance and Responsibility Principles-based vs. Rules-based Principles-based approach (1) Principles-based approach requires the company to adhere to the spirit rather than the letter of code. (2) The approaches focus on objectives rather than the mechanisms by which these objectives will be achieved. (3) The approaches can lay stress on those elements of corporate governance to which rules cannot easily be applied. (4) The approaches can applied across different legal jurisdictions rather being founded in the legal regulations of one country. (5) The approaches avoid inflexible legislation and allows companies to develop their own approaches to corporate governance. (6) The approaches are too board to be used as a guide to best corporate governance practice. (7) There may be confusion over what is compulsory and what isn’t. Ru les-based approach (1) Rules-based approach places more definite achievement and provide clarity in terms of what you must do. The rules are legal requirement. (2) The approaches allow no leeway. The key is whether or not you have complied with the rules. (3) It should in theory be easy to see whether there has been compliance with the rules. But that depends on whether the rules are unambiguous. (4) It is rigid and difficult to deal with questionable situation that are not covered sufficiently in the rulebook. Influence of ownership: Family firms vs. Joint-stock companies Insider systems Insider system is where companies are owned and controlled by a small number of major shareholders, which may be members of the company’s founding family. (Adv antages) (1) It is easier to establish ties between owners and managers. The agency problem is reduced in the case...
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