The Financial Review argues that the best approach to corporate governance is from the principles-based perspective. For instance, the principles-based approach to corporate governance permits companies to follow a framework of standards about what is to be achieved and implementations customised for the specific circumstances. Under this scope, all public listed companies are expected to meet the specific compliance standards through stock exchange without necessarily being restricted by the law. These compliance standards are usually defined by the corporate governance code. Companies are therefore, expected to operate under the provisions of the corporate governance code; and if for any reason, a company that fails to comply with the provisions of the code, must report to the stakeholders both the areas in which the compliance fails and give valid reasons for the lack of compliance.
The U.S 2012 Principles of Corporate Governance have been pivotal to the development of the public companies. Through the principles, companies continue to adapt and refine their governance procedures within the confines of evolving laws framework and stock exchange rules. In fact, the Business Roundtable CEOs have expressed their faith in the U.S Principles of Corporate Governance, stating that the United States has the best corporate governance, securities market systems, and financial reporting in the world. The main reason why the United States governance systems ranks the best in the world is because its framework of laws and regulations offer minimum requirements that are also flexible and easy to implement its customized practices to suit the companies’ needs as well as modification of the practices in light of changing conditions and standards provided under the U.S Principles of Corporate Governance.
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The principles-based approach to corporate governance has enabled most of the U.S public companies attain a global profile. This has promoted the companies’ interaction with various investors, suppliers, customers, and government regulators globally, especially given that the principles have made instant communications a norm. Besides, the removal of the strict adherence to the materiality fundamental principles by the Congress has served as a central tenet of the disclosure requirements as per the federal securities laws. The securities laws are instead utilized in addressing immaterial issues to the stakeholders’ investment and voting decisions. Public companies are therefore, expected to disclose information related to conflict minerals and payments to foreign governments for extraction of resources and mining safety. In addition, public companies need to disclose any relevant information in a social context, but of little relevance to material information needed by stakeholders in making investment decisions.
The Financial Review therefore, convinces that the principles-based approach to corporate governance has greatly shaped the fundamental changes in stakeholder engagement. This has enabled public companies to reach unprecedented proactive engagement levels with their key stakeholders. Finally, the principles-based approach to corporate governance has also heightened the role of shareholders to being more responsible and accountable in the companies’ well-being, especially in the 21 st century.
Global Times (GT)
The global times asserts that the best approach to corporate governance is from the rules-based point of view. The best example of the rules-approaches is Sarbanes-Oxley also known as ‘Sarbox’ or ‘SOX’. Under this scope, the explicit requirements are specified and compliance with those specifics is expected. Besides, rules are black and white; in that there is either compliance or noncompliance with a rule. It is the work of the investors (and not judiciary) to monitor and impose penalties for transgression. The implication here is that there is no theoretical distinction drawn between major and minor compliance failures; companies’ compliance is not only mandatory, but also a must.
The rules-based approach to corporate governance has two major perspectives that build its credibility and hence rank it above the principle-based approach. The first is the organization’s perspective. Under this perspective, the rules-based approach provides a clear outline on what is expected of all the involved companies. For instance, all the stipulated rules follow a legal framework hence ruling out the possibility of outlawed actions in the governance systems. The rules are also stated properly with clear outlines, and hence easy to understand and follow without seeking further clarification. Another advantage depicted under the organizational perspective is standardization for all companies. There is fairness for all business operations, as all companies must adhere to the stated rules and regulations without any favour or demoralization. Finally, the binding requirements availed by the rules-based approach foster the rules compliance.
Secondly, the rules-based approach offers a wider stakeholder perspective which has various merits attached to it. The standardization across all companies creates a level playing field for all companies, regardless of the influential status of their top stakeholders. The rules provide that sanction is a criminal act hence acting as a focal point for deterrence of transgression. The wider perspective also fosters confidence with regard to regulatory compliance among the involved companies. In addition, the 2002 SOX corporate governance regulations stand relevant to the United States companies, all the directors attached to the subsidiaries of U.S-listed businesses, and the various auditors serving the U.S-listed businesses.
The SOX, being an example of the rules-based approaches, is highly applicable in the 21 st century corporate governance. Under SOX, directors are held personally responsible for mismanagement and criminal punishment. It also provides effective communication for stakeholders’ material issues. The SOX greatly improves both investor and public confidence in corporate United States. The SOX ensures internal control and external audit of companies, hence minimising the companies’ financial mismanagement. It is through SOX that U.S has realized strengthened relationship between companies and audit firms. Finally, SOX has been applied in improvement of governance with the help of audit committees. Therefore, the Global Times convinces that the rules-based is the best recommended approach to corporate governance in the United States, especially in the 21 st century.
References
Doug McNamara & Banff Executive. (2019). Improving Governance Performance Rules-Based vs. Principles-Based Approaches. 10(16): 1-5. Downloaded from http://www.banffexeclead.com/AcumenPDF/Governance%20Articles/Leadership%20Acumen%2016%20V10%20Governance%20Principles%20vs%20Rules.pdf
Kaplan. (2012). Corporate governance approaches: Kaplan Financial Knowledge Bank. Retrieved September 10, 2019 from https://kfknowledgebank.kaplan.co.uk/corporate-20governance-20approaches
Maher, M., & Andersson, T. (1999). Corporate Governance: Effects on Firm Performance and Economic Growth. 1-51. Downloaded on https://www.oecd.org/sti/ind/2090569.pdf
Porino, G. (2017). Bottom-up approaches to corporate governance in the financial sector: Finance & Society. Retrieved September 10, 2019 from https://www.finance-watch.org/bottom-up-approaches-to-corporate-governance-in-the-financial-sector/
Principles of Corporate Governance: Principles of Corporate Governance. (2016). Retrieved September 10, 2019 from https://corpgov.law.harvard.edu/
