Rules and Principles Based Approaches to Corporate Governance

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Different Approaches to Corporate Governance

UK Corporate Governance Code

This is a principles based code.

The Code has no force in law and is enforced on listed companies through the London Stock Exchange. 

Listed companies have to state that they have complied with the code or else explain in a report to shareholders why they have not. If this report is not produced, then this is considered to be failure to comply. 

This is why this code is also known as soft law.

Unlisted companies are not required to comply with the code, although it is considered best practice to do so.

The main principles of the UK Corporate Governance Code are:

  • Leadership

  • Effectiveness

  • Accountability

  • Remuneration

  • Relations with Shareholders

An advantage of adopting a framework approach to ethics:

  • It can be applied relatively easily to new developments in business practice or to unique cases.

Sarbanes Oxely

As a consequence of the failure of Enron the United States has introduced Sarbanes-Oxley legislation to address many of the criticisms of reporting and auditing practice.

The Sarbanes Oxley Act in the United States takes a legislative approach which US listed companies MUST adhere to.

The Sarbanes-Oxley Act is not a system of comply or explain (as is the UK Code of Corporate Governance) but of legal compliance. 

SOX is a rules based approach to corporate governance, whereas the UK Code is a principles based approach to corporate governance.

In a rules–based code of corporate governance, the rules are a legal requirement and there are penalties for transgression which makes it clear that the rules must be complied with.

King Report

The King Report is South Africa’s attempt to deal with governance issues.

It is based on two legal principles, they are self-regulation and comply or explain.

The ultimate compliance officer of the King’s report are the stakeholders.

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