Corporate Governance Analysis

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Corporate Governance is the system by which firms are controlled and in essence directed, it includes several aspects and affects all aspects of a corporation. Governance is not one set of rules used to run corporations from around the world, just like the companies themselves there are several different types and each has its own benefits and determents. The principles-based form and the rule-based approach have very few similarities and several differences, the main one being the form of oversight. The rule-based approach is used in the United States and the principles-form is mostly used in other countries, the focus of this paper is to not only explain both approaches but also which is best.
The principles method which is used in countries around the world is also known as the comply-or-explain approach. The government of each firm’s country creates the corporate governance policies that are followed. These procedures are required to either be followed or the company must present the governing body with just cause on why they are not in compliance. This method has several benefits, one being its ability to apply to almost all firms; it is up to the management to apply these governance principles. There are several detriments to each method used today, one severe downside the Comply-or-Explain approach is that disciplinary action is not taken when a firm does not comply and fails because of that non-compliance. This was witnessed in the economic downturn in 2002, firms that were not in compliance experienced harsh economic conditions than those that did not.
The composition of the Board of Directors is a vital component of every corporate governance system, but yet it is only recommended in the principles method that the majo...

... middle of paper ... With the principles- approach there is a need for a more watchdog like governmental body, one that can impose penalties if a corporation does not comply or explain. While only a little over half of Germany based firms follow this approach where in the United Kingdom there is even less, it is important that these firms that do not follow explain why, they might even have a better approach to the principles they are not following. I believe that the Rules-Based approach that is used in the United States is the best option for corporate governance at this point in time, because of its ability to force compliance with the firms. However I think that the principles-based approach could eventually become a better option, due to its ability to change to the corporation’s needs, but only if there is a body of government that can oversee the compliance within the firms.
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