Definition & Issues Flashcards
(10 cards)
What is a principles-based approach to Corporate Governance?
Where there is a voluntary set of best practices, usual contained in a code of best practice (e.g. UK CG Code)
What is a rules based approach to corporate governance?
Where there is a mandatory set of laws, regulations and standards (e.g., Sarbanes-Oxley Act 2002)
What is the advantages of a principles based approach?
- It is flexible - the board can decide to deviate from a particular provision if it believes is appropriate
- Allows the company to exercise judgment to promote the success of the company
What is the disadvantages to the rules based approach?
It is rigid and does not allow for the adaptation or change in approach to cater for individual circumstances
What is the disadvantage to the principles-based approach?
It cannot be enforced because there are no sanctions or fines imposed for failing to follow the code and guidelines.
What are criticisms of the principles based approach?
It fails to ensure that there is a minimum standard of good governance and does not protect shareholders and other stakeholders sufficiently
What is the benefit of a rules based approach?
They can be accompanied by civil or criminal sanctions for a failure to comply with the minimum governance standards that have been imposed by that jurisdiction
What is Corporate Governance? (Cadbury Committee)
The system by which companies are directed and controlled
How does the OECD define corporate governance?
A set of relations between a company’s shareholders, management and other stakeholders and provides the structure through which the objectives of the company are set, obtained, and monitored
How does the King IV report say on Corporate Governance?
CG is the exercise of ethical and effective leadership by a governing body towards the achievement of its objectives
