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

Halvorsen Retail plc operates in a jurisdiction whose corporate governance code requires listed companies to either comply with each provision or explain publicly why they have departed from it. The board has chosen not to adopt the provision requiring a majority of independent directors on the audit committee and has set out its reasons in the annual report. Which governance approach does this regulatory regime represent?

This is a principles-based approach. Comply-or-explain lets the board depart from a provision provided it publicly explains why, giving flexibility and leaving shareholders to judge the reasoning. A rules-based approach would make the provisions mandatory with penalties for non-compliance, regardless of any explanation offered.

  1. AA principles-based approach, because departures are permitted if explainedCorrect
  2. BA rules-based approach, because each provision is a mandatory legal requirement
  3. CA rules-based approach, because disclosure is required for every departure
  4. DA statutory approach, because the annual report is a legal document

Explanation

A comply-or-explain regime is the hallmark of the principles-based approach. It allows flexibility so long as the company justifies departures to shareholders. A rules-based approach would not allow the board to opt out simply by explaining.

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