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ACCA Applied Knowledge · Business and Technology · Governance in business organisations

Which of the following is a disadvantage of a principles-based approach to corporate governance?

A key disadvantage of a principles-based approach is that companies may give weak or vague explanations for non-compliance, and the system relies on shareholders challenging them. This can make real compliance harder to ensure than under detailed mandatory rules.

  1. AIt cannot be adapted to different company sizes or sectors
  2. BCompanies may give weak explanations, making it harder to ensure real complianceCorrect
  3. CIt requires criminal penalties for every departure
  4. DIt prevents companies from adopting best practice voluntarily

Explanation

Because departures are allowed if explained, some companies may offer vague or poor justifications, and the approach relies on shareholders scrutinising them. Flexibility is a strength, and the approach does not require criminal penalties or stop voluntary best practice.

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