Reconciling Rules and Principles: An Ethics-Based Approach to Corporate Governance

Abstract

In this paper, we consider the nature of recent corporate abuses both in the U.S. and in Europe, and how globalization has had an impact on amplifying their consequences. We discuss the rules-based and principlesbased remedies that have been proposed in each region, respectively. With a focus on the U.S. Sarbanes-Oxley Act (SOA), we examine the principles forwarded by this act, and how it addresses those principles with specific rules and governance mechanisms. Invoking Integrative Social Contracts Theory (ISCT), we conclude with a reconciliation of the principles and rules-based approaches to corporate governance as suggested by theory.

National Transparency Regimes: Rules or Principles? A Comparative Analysis of the United States and The Netherlands

“…These systems reflect respectively that decisions can be made based on legalistic approaches characterized by directing and controlling (rules-based) or more normative approaches characterized by valuebased argumentation techniques (principles-based). Sama and Shoaf (2005) point out that rules-based approaches are more commonly found in societies favoring bureaucracies, whereas a principles-based approach is more commonly found in societies characterized by strong and operative social controls. Analyzing the initial paths, the United States stems from a stateless tradition, in which government rather than state is the core concept (Rutgers, 2001), whereas, The Netherlands stems from a stateness tradition within which the state provides the context in which the interactions take place (See Table 5).…”

“…In other academic fields (Black, 2008;Burgemeestre, Hulstijn, & Tan, 2009) rules-based and principles-based approaches have been identified as underlying theoretical tenets for policy regimes. In the field of corporate governance (Sama & Shoaf, 2005) and compliance (Burgemeestre et al, 2009) these approaches have been used as a framework to analyze the differences between the United States and the EU in which they conclude that the U.S. approach can be characterized as more rules-based whereas the EU approach as more principles-based. In this section we analyze whether this framework is useful for transparency regimes as well.…”

“…A principles-based approach is more implicit and emphasizes "doing the right thing" by appropriate means (Arjoon, 2006). Finally, a rules-based approach is more commonly found in societies favoring bureaucracies while a principles-based approach is more commonly found in societies characterized by strong and operative social controls (Sama & Shoaf, 2005).…”

“…Moreover it might lead to an attempt to look for loopholes as ways for obeying to the rules while still doing things that the rules were intended to prevent (Stewart, 1996). Principles-based approaches may be too broad to interpret a micro level for the individual decision-maker (Sama & Shoaf, 2005). A rules-based approach can be seen as a necessary condition for effective government and a principles-based approach as a sufficient condition (Arjoon, 2006).…”

“…Countries that are developing transparency regimes or are enhancing their transparency arrangements should be aware of these differences and develop a mix that fits their context. After all, the imposition of rules in a normbased society could meet resistance, while the expectation that principles will adequately control (organizational) behavior could meet skepticism in rule-bound societies (Sama & Shoaf, 2005). Not all characteristics of the American and Dutch transparency policies fit exactly within the framework of a rules-based or principles-based approach.…”