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ACCA Strategic Professional · Strategic Business Leader · Governance scope and approaches

Halvern Plc is listed in a jurisdiction whose corporate governance code applies a 'comply or explain' approach. In its annual report the board states that it has not followed the code provision requiring a majority of independent non-executive directors. It explains that the company is in a turnaround, that the current mix is temporary, and that a plan exists to reach compliance within 18 months. Which statement best describes the governance implication of this approach?

Under comply or explain, a board may depart from a code provision if it gives a clear, reasoned explanation, such as a temporary turnaround and a plan to comply. Shareholders then judge whether the explanation is acceptable. This differs from a rules-based approach, where departures are breaches that attract penalties.

  1. AThe board has breached the code, because any departure from a provision is a violation that regulators must penalise
  2. BThe board may depart from the provision provided it gives a reasoned explanation, and shareholders then judge whether the explanation is acceptableCorrect
  3. CThe board is exempt from disclosure because the code is voluntary and applies only to unlisted companies
  4. DThe board must immediately appoint independent directors, because comply or explain permits no time-limited departures

Explanation

Under a comply-or-explain (principles-based) approach, companies may depart from provisions if they disclose and justify the departure. Shareholders and markets assess the explanation. The option claiming any departure is a breach describes a rules-based approach, which is not what is described here.

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