FINS3626 WEEK 3 TUTORIAL

1. What are the pros and cons of rules-based and principles-based approaches to
corporate governance? Is one approach better than the other?
Rules based governance is a set of established rules that must be followed when
regulating a corporation.
The advantages are:
certainty and predictability
ease of compliance
high transparency
The disadvantages are:
high costs to draft rules and update
excessive litigation
Principles based regulations are broad guidelines that corporations use to achieve their
outcomes. It
involves best judgement by executives and management.
The advantages are:

greater flexibility and freedom for management

more innovative and competitive structure
closer fit to meeting objectives

The disadvantages are:

training costs and innovative entrepreneurial skills required
management goals may not align with shareholders; need incentive goals
more challenging for supervisors and the supervised
2. Refer to the ASX Corporate Governance Recommendations: what are the eight
principles of corporate governance recommended by the ASX? Any incentive for
management to willingly introduce these arrangements?
Lay solid foundations for management and oversight *
Structure the board to add value
Act ethically and responsibly
Safeguard integrity in corporate reporting *
Make timely and balanced disclosure
Respect the rights of security holders
Recognise and manage risk
Remunerate fairly and responsibly *
3. Would you expect regulation and arrangements regarding corporate governance to be
different or similar in different countries? Consider the insider vs. outsider systems.
Insider: close relationship between insider shareholders and managers
Outsider: managers control firms but are owned by outside/separate financial entities
It should be similar because the regulations are dependent on corporate structure, not
different countries.
4. What are the issues faced by the ASIC? What do you think is the main problem? Can
you think of the solutions?