Principle Based Approach and Rule Based Approach in Corporate Governance

ETHICS AND CORPORATE
SOCIAL RESPONSIBILITY

PRINCIPLE BASED APPROACH
The corporate governance principles are aimed at guiding the organisations for the
improvement of transparency and community trust while discharging the business functions.
One of the forms that the corporate governance principles can take place is the Principle
Based Approach. The approach is based on the underlying assumption that business
environment differs from company to company and thus a single set of principle cannot be
applied on every organisation. Hence, the approach is suggestive of certain principles and not
rules to be followed by the entities while designing their corporate governance code. The
application of these principles may be different from companies to companies as per the
situations and circumstances. Thus, the said approach is also termed ad “comply or explain”
approach. In UK, the corporate governance practices are based on the principle based
approach which has following mentioned advantages and disadvantages.
The prime advantage is that the companies report the actual circumstances of the
business and thus, such a customised report is more meaningful as opposed to specialised
detailed reporting format. In addition, the next key benefit is that there is an ease of amending
the principles of the corporate governance in the said approach as a response to the changing
conditions and changing expectations of the various stakeholders connected to the enterprise.
The said ease is absent in the case of changes in the statutory requirements. Thus, it can be
rightly stated that the principle based approach provides a better picture of the corporate
social responsibility in light of the current changes in the business environment. The further
advantage can be listed to be that it encourages the senior management of the enterprise
including the directors of the organisations to follow the spirit of the code rather simply
ticking off the compliances for the sake of it. Thus, there is a room for continuous
improvement for the organisation as a whole.
However the said approach is surrounded by certain criticisms as well as listed below.
It is imperative to note that the said principle leaves the onus on various stakeholders for the
measurement of adherence to principles such as the investors, community members, donors,
or others. Hence, these parties are left with the responsibility to demand public reporting or
the communication from entities, which makes the absence of uniformity in the compliance
and difficulties to overlook the practices of organizations. The yet another criticism of the
said approach is that the said approach tends to result in the generalised statements which