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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Valtor plc, a listed manufacturer, has a board that follows a principles-based corporate governance code. In its annual report the board states that it has not appointed an independent majority to the audit committee, explains that the company is small and that two independent directors are in place, and describes how it will review the position next year. Which approach to governance and compliance does this illustrate?

This is comply or explain. A principles-based code lets a company depart from a provision if it discloses the departure, gives reasons and describes alternative arrangements. Valtor does so for its audit committee, whereas a rules-based approach would treat the departure as a breach of mandatory requirements.

  1. AComply or explain, where departures from the code are permitted if justified to shareholdersCorrect
  2. BRules-based compliance, where any departure from the code is a breach punishable by law
  3. CVoluntary non-disclosure, where companies need not report on code compliance
  4. DRegulatory capture, where the company influences the code to suit itself

Explanation

Under a principles-based code, companies may depart from provisions provided they explain the reasons and the alternative arrangements to shareholders. Valtor does exactly this. A rules-based regime would treat the departure as a breach, which is the key distractor.

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