Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In Corporate Governance, what does 'comply or explain' refer to?

1. A requirement to follow every law without exception

2. A mandate for companies to comply with regulations

3. Expectation to comply with the UK Corporate Governance Code or explain non-compliance

4. A policy allowing companies to choose between compliance and fines

The correct answer is: Expectation to comply with the UK Corporate Governance Code or explain non-compliance

In the context of corporate governance, 'comply or explain' refers specifically to the expectation that companies comply with the UK Corporate Governance Code or provide an explanation for any non-compliance. This approach allows companies the flexibility to deviate from certain provisions of the Code, provided they justify their reasons transparently to stakeholders. This principle is important because it recognizes that one size does not always fit all; different companies may have distinct circumstances that warrant alternative governance practices. By explaining the rationale behind non-compliance, companies promote transparency, accountability, and informed decision-making among investors and the public. The other options do not accurately capture the essence of 'comply or explain.' For instance, the first option suggests an absolute requirement with no room for discretion, while the second implies a blanket mandate without consideration for circumstances, which is not aligned with the flexibility inherent in the 'comply or explain' principle. The last option incorrectly frames the framework as a choice between compliance and consequences, rather than an opportunity for transparency in governance practices.