Managing Fraud Risk: A Practical Guide for Directors and Managers

The Development of Corporate Governance Codes and Legislation

Rules-Based and Principles-Based Governance Regimes

Corporate governance regimes have developed in different ways around the world. History, culture and tradition have played a big part in the way that governance has developed in each country. There is one fundamental difference in the way that governance has developed and that is between those regimes that are based on rules and those that are based on principles.

• Some governance systems are based firmly on the law. That is to say, compliance with the system is underpinned by legislation. Codes with legal enforceability are rules and so these are known as “rules-based” regimes. The most important example of this is the US where compliance with the SOX for example is a legal requirement for listed companies and their directors.
• Others are based on governance codes of best practice where compliance is voluntary rather than a legal requirement. These are known as “principles-based” regimes. The first such code emerged in the UK out of the work of the Cadbury Committee in 1992. Here the findings of the Committee were not incorporated into company law as many at the time expected to happen. The Committee took the view that informality would be more powerful than legal rules: “At the heart of the Committee's recommendations is a Code of Best Practice designed to achieve the necessary high standards of corporate behaviour” (Cadbury Committee, paragraph 1.3, 1992).⁸ The requirement ...