Rules Based Approach vs Principles Based Approach in Corporate Governance

Difference between Rules Based Approach and Principles Based Approach in Corporate Governance

Difference between Rules-Based Approach and Principles-Based Approach are explained in the below table,

Rules-Based ApproachPrinciple-Based Approach
Legal RequirementNot a Legal Requirement
Code of Corporate Governance is a set of legal requirements mentioned in the Act.Code of Corporate Governance is a set of best practices that companies should follow.
Compliance or non-compliance Judgements are being made by the court.Compliance or non-compliance Judgements are being made by the owners of the business (shareholders)
Practically it is difficult to set up rules that are suitable for every set of circumstances.This is the usual approach which most organizations in the world are practicing.
Non-compliance will result in heavy penalties in the form of fines.Non-compliance will result in an explanation to the shareholders by the board.
Rules Based Approach vs Principle Based Approach

In the rules-based approach, there will be legal requirements for companies to follow the rules laid down. There will be legal consequences if the board fails to follow the requirements mentioned in the Act.

In the principles-based approach, the board can adhere to the best practices laid out, while having some space for flexibility based on different circumstances. Compliance or non-compliance Judgements are being made by the owners of business in this method. This is the usual approach which most organizations in the world are practicing.

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