Part A - Governance and Responsibility
Principles-based vs. Rules-based
Principles-based approach
(1) Principles-based approach requires the company to adhere to thespirit rather than the letter of code.
(2) The approaches focus on objectives rather than the mechanisms bywhich these objectives will be achieved.
(3) The approaches can lay stress on those elements of corporategovernance to which rules cannot easily be applied.
(4) The approaches can applied across different legal jurisdictionsrather being founded in the legal regulations of one country.
(5) The approaches avoid inflexible legislation and allows companies todevelop their own approaches to corporate governance.
(6) The approaches are too board to be used as a guide to bestcorporate governance practice.
(7) There may be confusion over what is compulsory and what isn’t.
Rules-based approach
(1) Rules-based approach places more definite achievement and provideclarity in terms of what you must do. The rules are legal requirement.
(2) The approaches allow no leeway. The key is whether or not you havecomplied with the rules.
(3) It should in theory be easy to see whether there has beencompliance with the rules. But that depends on whether the rules areunambiguous.
(4) It is rigid and difficult to deal with questionable situation thatare not covered sufficiently in the rulebook.
Influence of ownership: Family firms vs. Joint-stockcompanies
Insider systems
Insider system is where companies are ownedand controlled by a small number of major shareholders, which may be members ofthe company’s founding family.
(Advantages)
(1) It is easier to establish ties between owners and managers. Theagency problem is reduced in the case of that the owners are involved inmanagement.
(2) It is easier to influence company management even if the owners arenot involved in management.
(3) A smaller base of shareholders may be more able to take a long-termview. Long-term growth is a bigger issue for such families.
(Disadvantages)
(1) There may be discrimination against minority shareholders and lackof minority shareholders protections.
(2) Insider systems tend not to be monitored effectively and may bereluctant to employ outsiders in influential position.
(3) Insider systems often don’t develop more formal governancestructures.
(4) Insider systems may be more prone to opaque financial transactionsand misuse of fund.
Outsider systems
Outsider systems are companies whereshareholding is more widely dispersed, and there is the manager-ownershipseparation.
(Advantages)
(1) The separation of ownership and management has provided an impetusfor the development of more robust governance to protect shareholders.
(2) Shareholders have voting rights that they can use to exercisecontrol.
(3) Hostile takeovers become far more frequent and this kind of threatsact as a disciplining mechanism on company management.
(Disadvantages)
(1) Companies are more likely to have an agency problem and significantcosts of agency.
(2) Larger shareholders have often had short-term priorities.
Stakeholders in corporate governance
(1) Stakeholders are any entity (person, group or non-human entity)that can affect or be affected by the actions or policies of an organization. Itis a bi-directional relationship.
(2) Stakeholder theory indicates that large companies have significantimpact on society so that they cannot only be responsible to theirshareholders, but have accountability to a broad range of stakeholders.
(3) Companies should concentrate on employees, creditors and governmentas well as behave ethically and have regard for the environment and society asa whole.
Instrumental view vs. Normativeviews
(Instrumentalview)
(1) From the point of instrumental view, the motivation of companies tofulfill the responsibilities towards stakeholders is that they believe that it wouldhave an impact on maximizing company’s profits if not to do so.
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