Skip to content

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

Kessler Holdings plc is listed under a comply-or-explain code. Over several years, the chair has not adopted the recommended separation of chair and chief executive roles, giving brief boilerplate explanations such as 'this suits the company'. Major institutional investors have not challenged this. Which conclusion about the effectiveness of the principles-based approach does the case best support?

The case shows that a principles-based approach depends on active shareholder scrutiny. Comply-or-explain works only if investors evaluate explanations and challenge weak ones. Where investors are passive and boards give boilerplate reasons, the market discipline that underpins the approach is weakened, even though the mechanism technically exists.

  1. AThe approach has failed because it contains no mechanism for stakeholders to respond
  2. BThe approach relies on shareholder engagement and scrutiny of explanations; if investors are passive, its effectiveness is weakenedCorrect
  3. CThe approach should be replaced by rules-based regulation because explanations are always inadequate
  4. DThe approach is unaffected, because the explanation requirement alone ensures good governance

Explanation

Comply-or-explain depends on informed shareholders assessing explanations and acting on poor ones. Passive investors weaken the discipline. The approach is not inherently broken, as it does contain a mechanism, and the case does not prove explanations are always inadequate. Disclosure alone does not ensure good governance.

Did you get it right without looking?

One question tells you little. A timed set on Governance scope and approaches shows your real accuracy, how long you take and where you lose marks.

Practise Governance scope and approachesFree diagnostic mock

More Governance scope and approaches questions