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ACCA Strategic Professional · Advanced Financial Management · Corporate environmental, social, governance (ESG) and ethical issues

Under a rules-based approach to corporate governance compared with a principles-based approach, which statement is correct?

A rules-based approach requires compliance with specific mandatory provisions, usually enforced by law, whereas a principles-based approach sets broad principles and lets companies either comply or explain why they have departed. Principles-based regimes are therefore more flexible and rely on market and shareholder scrutiny.

  1. AA rules-based approach demands compliance with specified requirements, whereas a principles-based approach lets companies comply or explain departuresCorrect
  2. BA principles-based approach imposes legal penalties for any departure from its provisions
  3. CA rules-based approach is more flexible because boards choose which rules apply to them
  4. DA principles-based approach is mandatory only for unlisted companies

Explanation

Rules-based regimes, such as Sarbanes-Oxley in the US, set mandatory requirements with legal sanctions. Principles-based regimes, such as the UK Code, use comply-or-explain and allow tailored practices. The other statements reverse flexibility and enforcement or invent a link to unlisted companies.

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