Rules and Policies are sometimes so packed together that it becomes impossible to segregate one from the other. And it varies from one perspective to the other that whether rules are based on policies or policies are based on rules. Therefore, it will be good if we first confine our discussion to an understandable perspective so that we can understand the difference.
In context of business entities, rules usually mean the rules applied by government or some other body responsible for regulating business entities.
Rules are clear instructions that must be followed by the entities. And in case if rules are not followed then entity will have to face some legal action in the form of penalties, suspension etc. So basically rules are given the ability to have the protection of their own.
Policies relates to how the rules are going to be implemented. Entities design their policies on the basis of rules applied by regulatory authorities AND their business objectives. Policies basically give a direction to the entity that is in line with both applicable laws and aims that business wants to achieve.
But here is another thing. Based on these policies, management may design internal rules for imposition of such policies.
A company is required to file a return by last day of the month.This is the rule set by regulatory authorities.
Entity’s policy can be that returns should be submitted as early as possible so that our company is never considered in scrutiny.
Whereas, internal rule can be that data pertaining to the returns must be updated by 20th of every month so that considerable time is available for preparation of returns.
So, in summary it can be represented as follows:
Rules designed by regulatory authority > Entity wide policies designed by management > Internal rules designed by management
As said earlier, how rules and policies are connected to each other is a matter of how we are looking at things. But there is one thing that should be remembered i.e.:
Rules are clear set of instructions rather dictation which MUST be followed and if rules are not obeyed i.e. it is considered as breaking the rules and is punished. This is the case with every rule whether it is applied on entity externally or entity has implemented it internally.
Whereas, policies can be considered as guidelines to be followed by management and other staff.
Due to this fact, it is usually said that rules are given “teeth” which is not the case with policies.