Principles Based Approach to Corporate Governance

Principles Based Approach
Principles based approach requires the company to adhere to the spirit rather than the letter of code. The company must either comply with the code or explain why it has not through reports to the appropriate body and its shareholders.

UK Combined Code
The UK model is a principles-based one, although adherence is part of stock exchange listing requirements, it can not be considered to be voluntary for larger companies.

International Convergence Codes
Many individual countries and governments have introduced governance codes applicable to corporations registered or listed within their jurisdictions. However, two organizations have published corporate governance codes intended to apply to multiple national jurisdictions. These organizations are,

a) The Organization for Economic Cooperation and Development ( OECD)Established in 1961, the OECD is an international organization composed of the industrialised market economy countries as well as some developing countries, and provides a forum in which to establish and coordinate policies.

The objectives of the OECD principles of Corporate Governance are as follows.

i. The OECD principles were updated and republished in 2004
ii. The principles represent the first initiative by an intergovernmental organization to develop the core elements of a good corporate governance regime.
iii. The principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve legal , institutional and regulatory framework for CG in their cuntries
iv. The principles focus on publicly traded companies, both financial and non-financial. However to the extent that they are deemed applicable, they might also be a useful tool for improving corporate governance in non-traded companies, e.g privately held and state owned enterprises.

b) The International Corporate Governance Network ( ICGN)
ICGN founded in 1995 at the instigation of major institutional investors, represent investors, companies, financial intermediaries, academic and other parties interested in the development of global corporate govennence practices.

The objectives of the ICGN statement on global corporate governance principles are as follows.

i. The ICGN Principles highlight corporate governance elements that ICGN- investing members take into account when making asset allocations and investment decisions.
ii. The IGCN principles mainly focus on the governance of corporations whose securities are traded in the market. But in many instances, the principles may also be applicable to private or closely held companies committed to governance.