Rule-bases and Principles-based Corporate Governance Approach

Characteristics of Rule Based Approach

1. prescribed set of cg requirements
2. quick way of ensuring compliance
3. adopts a checklist approach
4. clear distinction between compliance and non-compliance
5. easy to see that entity is complying
6. reduction of flexibility on the part of management and auditors
7. difficult to set rules to cover all situations
8. possible to misinterpret rules
9. same rules apply to all, whatever their size

Characteristics of Principles Based Approach

1. activities of entities must address major principles set out in codes of best practice
2. not simply a box ticking exercise
3. more difficult to avoid than a rules based approach
4. easy to see that entity is complying
5. directors required to work in the entity's best interests
6. more flexible, and therefore better able to deal with new situations
7. easier justification for apparent breach of principles
8. but principles may be interpreted differently