At its core, it's supposed to be about trusting your employees. It's supposed to be a sign that the management of the company trusts everyone to act like adults. If you abuse it and take off every week without getting your work done, then you shouldn't be there. Again, this is theory.
Others have already identified the struggles with this...it comes down to getting that message to everyone in the company. So, if your boss understands it differently than the HR dept, then you could get hosed.
Virgin just issued a "no vacation policy" within the last month. What they screwed up is the letter from Richard Branson essentially said "this is so you can take off as much time as you need. As long as you are up to date on all your projects and you don't have any outstanding tasks, you can take time off." Who can really say that ever? If you have everything up to date and you have no outstanding tasks, you're essentially irrelevant, no?