Page 16 - OCS Workbook - Day 2 Suggested Solutions (May 2018)

CIMA MAY 2018 – OPERATIONAL CASE STUDY

The principles-based code since it is not instilled in law, the entity themselves have to state that
is has complied with the requirements of the code or to explain why it could not do so in its
annual report. This will allow shareholders to know and understand the extent of any non-
compliance.

My initial thoughts would be that since the rules-based approach is administered through law,
we would be more likely to go for the principles-based approach as there are no such laws at
present in Lowerland. However I will review the pros and cons of each to help aid comparison.

Benefits of the rules-based approach

The main benefit of the rules-based approach is that it gives clarity to what the entity must do
and no option for a listed entity to not comply without legal implications. This level of clarity
allows for standardisation for all entities making it easier to draw comparisons between
organisations and time periods, creating a more level playing field.

Benefits of the principles-based approach

As the principles-based approach is much more flexible than the rules-based approach which
means there is more scope for interpretation and application in a manner best suiting to the size
and nature of the organisation. The “comply or explain” principle allows entities the option of
non-compliance if there is a good reason, and that reason must be explained in the annual
report.

The principles-based approach is more organic and encourages organisations to play by the rules
because they want to, and they believe in the importance of them. Not purely because they
have to or will be penalised. This invokes a more ethical approach and is also less structured and
less of a “box ticking” exercise.

Implementation to Mansako

Since Lowerland do not have legislation in place regarding a rules-based approach code of
corporate governance and it doesn’t seem to be in the pipe line the most natural approach for
Mansako would be to adhere to the a principles-based approach.

Corporate governance guidance generally incorporates the following:

Segregation of roles

Best practice usually recommends that the roles of chairman and chief executive officer should
be held by different people to reduce the power of prominent board members. In Mansako we
don’t have roles of CEO or chairman; we only have Anders Bucatti at the top with the other
directors reporting to him. It may be as part of our corporate governance review that we think
about putting roles of CEO in place or Anders Bucatti and appointing a separate chairman.

Committees

Good corporate governance would appoint committee groups to act as a control mechanism by
having specialist groups who can deal with areas such as audit, remuneration, risk and
nominations. The committee would usually be a mix of executive and non-executive directors.

72 KAPLAN PUBLISHING