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ACCA Applied Knowledge · Business and Technology · Governance in business organisations

A company's board decides to follow a principles-based approach to governance rather than a rules-based one. Which statement correctly describes this approach?

A principles-based approach requires companies to apply broad governance principles or explain why they have departed from them, often called comply or explain. It gives flexibility to suit each company's circumstances, unlike a rules-based approach, which imposes detailed mandatory requirements enforced by penalties.

  1. ACompanies must comply with the broad principles or explain why they have not, giving flexibility in how they apply themCorrect
  2. BCompanies must follow detailed legal rules, with penalties for any breach
  3. CCompanies are free to ignore governance entirely without explanation
  4. DOnly listed companies of a certain size may adopt any governance practices

Explanation

A principles-based approach, often described as 'comply or explain', sets broad principles and allows companies to depart from them if they give a reasoned explanation. A rules-based approach imposes detailed mandatory requirements with penalties, which is the alternative in option two. Ignoring governance without explanation is not permitted under either approach.

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