Corporate governance

  • Category:
  • Document type:
  • Level:
  • Page:
  • Words:



Principles-Based versus Rules-Based Governance Principles: Should Hard Law or Soft Law Take the Primary Role?


The institutional interplay study within the international environmental governance has become more and more pervasive. Hitherto, however, the attention focussed on the interaction between hard law or soft law has been very little. According to Skjærseth et al. (2003, p.104) contributions on hard as well as soft law in international governance are inclined to debate these forms of law individually. ‘Soft law’ according to Skjærseth et al. (2003, p.104) can be described as international norms, which are intentionally non-binding in character but are still legally relevant, positioned between politics and law. Some examples of soft laws include the international organizations resolutions as well as plans international codes of conduct or plans of actions. On the other hand, the “hard law” is an obligation that is legally binding and mostly involves delegating authority to third parties to interpret and implement the law. International governance was more legalized during the 20th century, but these days the legalization degree varies from soft law to hard law. The governance main goal is ensuring that individuals in power are answerable to the people whose interests they represent. For this reason, a governance framework based on principles allows for effective and open communication to the stakeholders. In consequence, this protects the reputation of the organisation, and may prevent a corporate failure. Scores of companies agree that good reputations translate to retention of talented employees. Therefore, organisations that have espoused principles-based governance frameworks can set as well as monitor the governance standards for themselves, their affiliates as well as be able to improve the governance standards within the industry.

Unlike the rules-based governance framework, the principles-based can produce proof of effectiveness to suppress tumult and can respond hastily to emerging risks. In the GCC, regulation is still rules-based and because of that governance is often approached by organisations as a process of strictly complying with rules instead of viewing governance from the broader stakeholder-based viewpoint. Therefore, this can be considered as a high-risk approach. In its place, organisations must adopt governance principles, which exemplify the essence of the rules. That is to say, the principles must edify determinations to adhere to the rules to make compliance be about nourishing the spirit of the regulatory purpose, and not just the letter. The present-day international relations according to Abbott and Snidal (2000, p.421) have been legalised impressively, but the legalisation at the international level exhibits a great variety. Some international institutions have considered the theoretical model of hard legalisation, but still, the majority of the international laws are distinctively ‘soft’. The focus of this article is the Principles-based versus Rules-based Governance Principles and seeks to determine whether the hard law or soft law should take the primary role.

Recent Development and Trend

.(Black, 2008, p.425), the wisdom and importance of PBR is amongst the unrelenting questions that face regulators of securities globally today. In 2003, the UK’s Financial Services Authority (FSA) shifted to the comprehensive principles-based regime, which drew a lot of interest in 2005 when an overwhelming number of international Initial Public Offerings occurred in London instead of New York City. The policy makers in New York, especially senator Charles Schumer and Mayor Michael Bloomberg blamed the shift on the overregulation in U.S. that had resulted in persisted woes, particularly in the New York financial sector Ford (2008, p.1)rigid compliance to RBR is inclined to support a mere culture of compliance, while PBR may promote a culture of justification as well as reflection. According to Laurie and Sethi (2013, p.45) asserts that the conflict that exists between rules normally results in the need for more rules so as to clarify what should be done. The RBR is rarely used nowadays because the rules usefulness is limited when the institution or the decision maker experiences an unexpected situation and there is no rule to solve it. On the other hand, PBR framework allows the institution or the decision-maker to consider commonly agreed objectives and broad-based values in determining the action that best fits according to certain advanced value(s) through reflection and deliberation. For this reason, overreliance on the detailed anticipatory drafting for all situations that are perceivable is prevented. The RBR can, on the other hand, disregard the objectives as well as values of the organisation under regulation; rather, it may vitalize the tick-box approach whereby people concentrate on satisfying a particular task in order to allow for compliance. With the view to practice culture, Laurie and Sethi (2013, p.45) envisaged principles-based regulation (PBR) as the utilisation of broadly-stated values, standards, and objectives through which institutions, as well as individuals, should conduct themselves. On the other hand, rules-based regulation (RBR) depends on adherence to certain rules and results in condemnations of rigidity; whereby a rule is at odds with another rule. In this case, there is no flexibility for establishing which rule should be followed. As mentioned by Laurie and Sethi (2013, p.45)In their study,

‘rules-based’ regime are nowadays maligned as paralleling with fault-finding bureaucracy wherein adhering to detailed provisions is very crucial than realising the overall outcome. For this reason, institutions and decision makers are emphasising on the ‘Principles-based’ because it arouses imageries of outcome orientated regulators that harbours ethical standards.Black (2010, p.3) asserts thatThe U.S. Treasury Secretary, Hank Paulson recommended that the country should shift to a U.K.-style approach of capital markets regulation that is more flexible so that the country could maintain its global competitiveness. The shift is attributed to the superior principles-based approach and not the mere disfavour of the Sarbanes-Oxley Act requirements. Furthermore, British Columbia has adopted the outcome-oriented and principles-based approach, and presently Canada as a whole is benefiting through advocacy and agency of British Columbia in the Canadian Securities Administrators (CSA). The coherent vision of British Columbia’s PBR regime has made a momentous manifestation at the negotiating table. In consequence, the crucial B.C. Model components are presently espoused across Canada by means of CSA National Instruments. Furthermore, new proposed rules have been issued by the CSA and are intended for inaugurating a revised registration regime that is nationally streamlined as well as harmonised for individuals and firms. In terms of firm compliance processes, the CSA has made it public that it plans to make principles-based rules. With regard to financial regulation, the FSA recently elevated the principles-based regulation as a form of regulatory rule. North America countries such as US and Canada have also espoused the PBR regimes for accounting, corporations, and securities.

have elevated the anxieties that RBR is very vulnerable and therefore, PBR should be espoused instead. Samaduzzaman (2012, p.5)regulators are utilising high-level principles so as to outspread the regulatory scrutiny scope. For instance, the FSA in the UK have extended its scrutiny to other areas like the design of the product. In view of this, it is evident that FSA is pushing its statutory jurisdiction boundary and this question whether utilisation of the general principles is a suitable way of developing regulatory policy. The present accounting shames according to Qu (2009, p.59), because the source of the problem, a regulation emphasising a lot on firms to rely on themselves so as to behave in a responsible manner. FSA as a UK regulators emphasised a lot on the PBR framework, but after the crisis, it fiercely responded to what it termed as markets’ betrayal. It had invested heavily on the PBR framework, but when the crisis hit, there was no alternative but only to pull it out from the market. The UK FSA replaced the PBR with the ‘outcome-based regulation’, but still other regulators are espousing the PBR framework even if it being abandoned by its key proponents. For instance, in Japan, the FSA sought to espouse the right balance between rules and principles in its quest for improved regulation. Recently, the regulatory reform blueprint suggested by Obama’s administration proposes the utilisation of the principles based regulation. The strengths associated with PBR have made it gain support from OECD countries, even though they caution that the suitable balance between principles and rules rely on numerous country-specific factors. The RBR framework is not used widely because it encourages the concerned individuals to look for loopholes within the rules, and look for means of circumventing the rules. This has recently been evidenced by political leaders in both the US and Canada shortly after new rules were passed that provide restrictions to the campaign fundraising. In some countries, RBR is preferred to PBR, which does not have the regulatory oversight that makes sure that the terms are interpreted reasonably and in a responsible manner. According to Black (2010, p.3)Before the global economic crisis in 2008, PBR was considered to be a solution that regulators, as well as firms, were seeking so as to deliver a regulatory regime that is responsive and effective. After the crisis, PBR according to

The Issue in International Context

In the international law and accounting domain, Burgemeestre et al. (2009, p.37) assert that there is an ongoing debate concerning the relative merits of PBR and RBR systems. In some countries, RBR is important because it details how people should behave; for instance, in the Dutch highways, speed limit according to the set rules is 120 km/hour. The PBR norms, on the other hand, are created as the guiding principles; for instance, many countries emphasise on the need to drive responsibly when it is raining or snowing. In the IT industry, a lot of regulations have been implemented; for instance, the ERP systems have been coded with the accounting standards while the business processes are being re-designed so as to comply with the existing rules. The governance approach espoused in different jurisdictions are varying; for instance, the Sarbanes-Oxley Act in the U.S. was introduced because of the concern that the Boards, CFO’s and CEO’s would particularly be accountable for the Management Estimates as well as for the Financial Statements published by their corporations (Macnamara, 2012, p.1). The Sarbanes-Oxley Act has espoused the RBR approach. In Canada, the Toronto Stock Exchange (TSE) declined to enunciate fast and hard rules, and instead decided to draft Guidelines, whereby companies’ Boards are expected to act in line with these guidelines.

Besides that, the Ontario Securities Commission (OSC) proposed best practices in governance by moving towards the quasi-rules based approach. A Combined Best Practices, as well as Principles of governance code, was released in the UK by London Stock Exchange (LSE), whereby companies are expected to self-report to the investment community with the goal of restoring trust in their market. In Hong Kong, Macnamara (2012, p.2) asserts that a law about good governance was introduced, and they are not rigid rules that should be observed but serve as guidelines for the corporations. In Germany, the OECD’s Principles of Governance was embraced by a Panel on Corporate Governance and emphasise on the transparency approaches to disclosure practices by the German listed companies. Soft laws have been espoused by many countries across the globe because they have scores of advantages than hard law and have independent advantages of their own (Abbott & Snidal, 2000, p.423). According to Abbott and Snidal (2000, p.456), soft law is a source of resourceful international ‘’contracts’, and is helpful in the creation of the normative discourses and ’covenants’ that may reshape international politics.


In summary, the article has maintained that PBR is widely espoused globally than RBR despite the fact that it has no slightest preparation standard. As mentioned in the article, principles-based are specifically valuable in allowing companies to fine-tune their understanding in terms of how to conduct corporate practices responsibly. There is a need for various international jurisdictions to utilise the broad principles so as to promote convergence and bridge differences to allow investors everywhere to benefit. Recently, the dramatic expansion and escalation of risk have made the global business environment more complicated. The transformation rate as well as the new risk categories that have surfaced, threaten the continued existence of many international companies. In order to remain competitive, companies must choose the best governance framework in terms of RBR and PBR. In view of the reviewed studies, it is without a doubt that soft laws are beneficial as compared to hard laws; therefore, they should take the primary role.


Abbott, K. & Snidal, D., 2000. Hard and Soft Law in International Governance. International Organization, vol. 54, no. 3, pp.421–56.

Black, J., 2008. Forms and paradoxes of principles-based regulation. Capital Markets Law Journal, vol. 3, no. 4, pp.425-57.

Black, J., 2010. The Rise, Fall and Fate of Principles Based Regulation. Working Paper. London : London School of Economics and Political Science.

Burgemeestre, B., Hulstijn, J. & Tan, Y.-H., 2009. Rule-based versus Principle-based Regulatory Compliance. In Proceedings of the 2009 conference on Legal Knowledge and Information Systems. Amsterdam, The Netherlands, 2009.

Ford, C.L., 2008. New Governance, Compliance, and Principles-Based Securities Regulation. American Business Law Journal, vol. 45, no. 1, pp.1-60.

Laurie, G. & Sethi, N., 2013. Towards Principles-Based Approaches to Governance of Healthrelated Research using Personal Data. The European Journal of Risk Regulation, vol. 4, no. 1, pp.43–57.

Macnamara, D., 2012. Improving Governance Performance Rules-Based vs. Principles-Based Approaches. Leadership Acumen, no. 16, pp.1-5.

Qu, S.C., 2009. Principles-based vs. Rules-based Regulation of Derivatives Markets in Developing and Developed Markets: A Comparison of the Regimes in Thailand and Québec. Thesis. Beijing: China University of Political Science and Law.

Samaduzzaman, M., 2012. The Importance Of Both Rules Based Approach And Principles Based Approaches To Eradicate Threats From Accounting And Auditing Profession. Arabian Journal of Business and Management Review, vol. 2, no. 4, pp.1-8.

Skjærseth, J.B., Stokke, O.S. & Wettestad, J., 2003. Soft Law, Hard Law, and Effective Implementation of International Environmental Norms. Global Environmental Politics, vol. 6, no. 3, pp.104-20.