CHAPTER 6

CORPORATE GOVERNANCE
APPROACHES

Mai Phuong Thao

Faculty of Accounting and Auditing
University of Economics and Law

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 Contents
1. Rule-based and principle-based approaches to corporate
governance

2. Sarbanes-Oxley (SOX)

3. Governance structures

4. International convergence

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 6.1. Rule-based and principle-
based approaches to corporate
governance (“CG”)

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 6.1. Rule-based and principle-
based approaches to CG (cont.)
• A rule-based approach:
is based on the view that companies must be
required by law to comply with established
principles of good corporate governance;
• A principle-based approach:
requires the company to adhere to the spirit rather
than the letter of the code. The company must
either comply with the code or explain why it has
not through the reports to the appropriate body and
4 its shareholders.
 6.1. Rule-based and principle-
based approaches to CG (cont.)

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 Choice of governance regime
The decision as to which approach to use for a country can
be governed by many factors:
• Dominant ownership structure (bank, family for multiple
shareholder)
• Legal system and its power/ability
• Government structure and policies
• State of the economy
• Culture and history
• Levels of capital inflow or investment coming into the
country
• Global economic and political climate
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 In favour of a rule-based approach

- Companies do not have the choice of ignoring the rules;

- All companies are required to meet the same minimum

standards of CG;

- Investors confidence in the stock market might be

improved if all the stock market companies are required to
comply with recognised CG rules

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 Against a rule-based approach

• Exploitation of loopholes-the exacting nature of the law

lends itself to the seeking of loopholes;

• Flexibility is lost-there is no choice in compliance to reflect

the nature of the organisation, its size or stage of
development;

• Checklist approach-this can arise as companies seek to

comply of all aspects of rules and start “box-ticking’.

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 Against a rule-based approach
• Regulation overload;
• Legal cost;
• There are some aspects of CG that cannot be regulated
easily such as negotiating the remuneration of directors,
deciding the most suitable range of skills and experience
for the board of directors, and assessing the performance
of the board and its directors.

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 Principle-based approach
• Based on the view that a single set of rules is
inappropriate for every company;

• Circumstances and situations differ between companies;

• Circumstances of the same company can change over

time.

=> A CG code should be applied to all major companies,

but this code should consist of principles, not rules.

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 Principle-based approach (cont.)

• The principles should be applied to all companies;

• Guidelines or provisions should be issued with the code;

• The way in which the principles are applied in practice
might differ for some companies, at least for some of the
time. Company should be allowed to ignore the guidelines
if this is appropriate;

• When a company does not comply, it should report this

fact to shareholders, and explain the reasons for non-
compliance.
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 6.2. Sarbanes-Oxley (SOX)
• SOX is a rule based approach;

• SOX is extremely detailed and carries the full force of the

law;

• It is relevant to US companies.

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 6.2. Sarbanes-Oxley (SOX) (cont.)

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 6.2. Sarbanes-Oxley (SOX) (cont.)
Key effects of SOX

• Personal liability of directors for mismanagement and

criminal punishment;

• Improved investor and public confidence in corporate US;

• Improve internal control and external audits companies;

• Improve governance through audit committee.

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 6.2. Sarbanes-Oxley (SOX) (cont.)
Negative reaction to SOX
• Doubling of audit fee costs to organizations;

• Onerous documentation and internal control

costs;

• Reduced flexibility and responsiveness of the

companies;

• Reduce risk taking and competitiveness of

16 organizations.
 6.3. Governance structures

A wider world view of governance requires consideration of

the nature of ownership, power and control.

Family structures
A family structure exits where a family has a controlling
number of share in a company. This has potential benefits
and problems for the company, and the other shareholders
involved.

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 6.3. Governance structures (cont.)
Problems
• Gene pool: The gene pool of expertise in owner
managers must be questionable over generation;

• Feuds: Families fight, and this is an added element of

cultural complexity in the business operation;

• Separation: families separate and this could be costly in

terms of buying out shareholding and restructuring.

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 6.3. Governance structures (cont.)
Insider-donated structures
This is an extension of the same idea. Inside-donated
structures are where listed companies are dominated by a
small group of shareholder. These:
• May be family owned;
• May be banks, other companies or government.

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 6.3. Governance structures (cont.)
Benefits
• Fewer agency problems and costs
• Lower cost of capital
• Greater access to capital
• Ethics
• Less likelihood of suffering short-termism
• Greater, stable expert input to managerial decisions
Problems
• Lack of minority shareholder protection
• Opaque operations and lack of transparency in reporting
• Misuse of power
• The market is not decided or governed
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 6.4. International convergence
Two organizations have published CG codes intended to
apply to multiple national jurisdiction. They are:
- The Organization for Economics Cooperation and
Development (OECD);

- The International CG Network (ICGN).

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 6.4. International convergence (cont.)

OECD is an international organization composed of the

industrialized market economy countries, as well as some
developing countries, and provides forum in which to
establish and co-ordinate policies.

Content
• Ensure the basis for an effective CG framework
• The right of shareholders and key ownership functions
• The role of Shareholders in CG
• Disclosure and transparency
• The responsibility of the board.
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 6.4. International convergence (cont.)

ICGN founded in 1995 represents investors, companies,

financial intermediaries, academics, and other parties
interested in the development of global cg practices.

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 6.4. International convergence (cont.)
Content:
• Corporate objective-Shareholder returns
• Disclosure and transparency
• Audit
• Shareholders’ ownership, responsibilities, voting right and
remedies
• Corporate board
• Corporate remuneration policies
• Corporate citizenship, shareholder relations and the
ethical conduct of business
• CG implementation
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 6.4. International convergence (cont.)
Limitation
• All codes are voluntary and are not legally enforceable
unless enshrined in statute by individual countries
• Local differences in company ownership model may
mean parts of the codes are not applicable.

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 Q&A

Thank you!

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