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

Ostrava Holdings is incorporated in a country that is considering switching from a principles-based 'comply or explain' code to a rules-based statutory regime after several corporate scandals. Institutional investors argue against the switch. Which argument would most credibly support the investors' position?

The strongest argument is that a rules-based regime is inflexible and invites box-ticking, whereas a principles-based comply-or-explain code lets boards tailor governance to their circumstances while remaining accountable to shareholders through explanation. The other arguments misstate how the regimes work, including enforcement and compliance cost.

  1. ARules-based regimes remove the need for any board judgement, so they always produce better governance
  2. BStatutory rules are inflexible and may encourage box-ticking compliance, whereas a principles-based code lets boards tailor governance to their circumstances while accountable to shareholdersCorrect
  3. CPrinciples-based codes are legally enforceable through criminal penalties, which makes them stricter
  4. DA rules-based regime has lower compliance costs for every company regardless of size

Explanation

The usual case for a principles-based approach is flexibility and fitting governance to each company, with accountability through explanation and investor scrutiny. A rules-based approach risks box-ticking and one-size-fits-all costs. The claims that rules eliminate judgement, that principles codes are criminally enforceable, or that rules always reduce costs are incorrect.

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