4 At an academic conference, a debate took place on the implementation of corporate governance practices in developing countries. Professor James West from North America argued that one of the key needs for developing countries was to implement rigorous systems of corporate governance to underpin investor confidence in businesses in those countries. If they did not, he warned, there would be no lasting economic growth as potential foreign inward investors would be discouraged from investing. In reply, Professor Amy Leroi, herself from a developing country, reported that many developing countries are discussing these issues at governmental level. One issue, she said, was about whether to adopt a rules-based or a principles-based approach. She pointed to evidence highlighting a reduced number of small and medium sized initial public offerings in New York compared to significant growth in London. She suggested that this change could be attributed to the costs of complying with Sarbanes-Oxley in the United States and that over-regulation would be the last thing that a developing country would need. She concluded that a principles-based approach, such as in the United Kingdom, was preferable for developing countries. Professor Leroi drew attention to an important section of the Sarbanes-Oxley Act to illustrate her point. The key requirement of that section was to externally report on – and have attested (verified) – internal controls. This was, she argued, far too ambitious for small and medium companies that tended to dominate the economies of developing countries. Professor West countered by saying that whilst Sarbanes-Oxley may have had some problems, it remained the case that it regulated corporate governance in the ‘largest and most successful economy in the world’. He said that rules will sometimes be hard to follow but that is no reason to abandon them in favour of what he referred to as ‘softer’ approaches. (a) There are arguments for both rules and principles-based approaches to corporate governance. Required: (i) Describe the essential features of a rules-based approach to corporate governance (3 marks)