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

A listed company's governance code uses 'comply or explain'. The company has not appointed a majority of independent non-executive directors and its annual report gives a clear, reasoned justification for this. Which is the most accurate description of its position?

The company is acting consistently with comply or explain. The approach permits departures from code provisions if the reasons are clearly disclosed, leaving shareholders to judge whether the explanation is acceptable. It is not an automatic breach and does not excuse non-compliance with other provisions.

  1. AIt has breached the code and must be penalised automatically
  2. BIt has acted consistently with the comply-or-explain approach, and shareholders may judge the explanationCorrect
  3. CIt must immediately delist from the stock exchange
  4. DIt is permitted to ignore all other provisions of the code

Explanation

Comply or explain allows departure from a provision provided the reason is disclosed. Shareholders and other stakeholders then assess whether the explanation is acceptable. It is not an automatic breach, and it does not release the company from other provisions.

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