COMPARISON OF RULES-BASED AND PRINCIPLES-BASED SYSTEMS

RULES BASED

1. As it is rules based, compliance will be 100%.
2. Non-compliance is punishable by law including fines, de-listing and imprisonment of directors.
3. If the law is good then it will give shareholders assurance that a company is being run effectively.
4. It lacks flexibility as laws are slow to change.
5. In making the rules law and the penalties high, companies can overdo their corporate governance. This is costly and time consuming.

PRINCIPLES BASED SYSTEM

1. It is flexible so companies of different sizes, nature or stages of development can comply.
2. Companies can comply with spirit of principles rather than just ‘ticking boxes’.