“Methods used in

Corporate
Governance”
Corporate governance

Is the system of rules, practices and processes by which a company is

directed and controlled. Corporate governance essentially involves balancing
the interests of a company's many stakeholders, such as shareholders,
management, customers, suppliers, financiers, government and the
community. Since corporate governance also provides the framework for
attaining a company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance
measurement and corporate disclosure.

Approaches used in Corporate Governance

1. Rules-Based Approach which is adopted from United States instills the

code into law with appropriate penalties for transgression. It occurs
when behaviour is underpinned and prescribed by statute of the
country’s legislature. Therefore, companies adhere to the rules or pay
penalties. Compliance is therefore enforceable in law such that
companies can face legal action if they fail to comply.

ADVANTAGES
 Clarity
 Standardization
 Penalties are a deterrent against bad Corporate Governance
 Easier compliance with the rules, as they are unambiguous, and can be
evidenced

DISADVANTAGES
 Not suitable to all possible situations.
 Creates unnecessary administration burden on some companies
 Does not necessarily fit all.
 Expensive

2. Principle-Based System

The principle of “comply or explain” means that companies have to take

seriously the general principles of relevant governance corporate codes.
Advantages:

 Not so rigid, allows for different circumstances.

 Allows companies to go beyond the minimum required.
 Less of an admin burden.
 Can develop own specific CG and
 Internal controls (For example physical controls over cash will be
vital to some businesses and less relevant or not applicable to others.

Disadvantages:

 The principles are so broad that they are of very little use as a guide to
best
corporate government practice

 Not easier compliance as with the rules, as they are ambiguous, and
cannot be evidenced

Characteristics of Principle Approach:

 Focuses on objectives rather than the means by which these objectives

will be achieved

 Principles based approach can deal with those areas of corporate

governance where rules cannot easily be applied e.g. internal control

 Can be applied across different legal jurisdictions

 Companies can deviate from a principle on a comply or explain basis

 Principles based approaches have often been adopted in jurisdictions

where the governing bodies of stock markets have had the rime role in
setting standards for companies to follow

 Principle based approach has greater flexibility than if it was under

pinned by legal requirements
Characteristics of Rules Based Approach:

 Rule based approach is more emphasis on definite achievement rather

than underlying objectives.

 Rules based approaches allow no leeway. Compliance is mandatory.

 In theory it should be easy to see whether there has been compliance

with the rules or not

 Rules based approach have difficulties in dealing with questionable

situation that are not covered sufficiently in the rulebook

 Rules based approach focuses greatly on obeying the letter of the law
rather than the spirit

 Regulators and auditors enforce rules based approach.

 Rules based approaches to corporate governance tend to be found in

legal jurisdictions and cultures.