Corporate Governance today – Why the Government Commission misinterprets the “Apply and Explain” principle

Apply-and-Explain

The government commission has discovered a new governance principle: As a result of the current reform of the Code, the “Apply and explain” principle should take effect – companies should therefore explain how they implement the recommendations in concrete terms.

At its core, this is a good idea because it promotes reflection and discussion in companies. And in my view, these are the keys to a new, better corporate governance culture. I have therefore already argued in 2017 for an innovative code for “apply and explain” as part of my draft (and have thus met with disinterest on the part of the Commission).

Is that why I’m happy about the change in thinking? No, because there is a big catch: the Commission does not want to introduce the principle instead, but in addition to “comply or explain”. Management boards and supervisory boards must therefore continue to justify themselves if they do not follow recommendations and thus do not correspond to the ideal defined by the government commission.

New ways of reporting

The fact that they are now also to explain how they are implementing the remaining recommendations is likely to intensify the impression that corporate governance in Germany is primarily about bureaucracy and paternalism. And that leads to formalism instead of reflection.

Anyone who really wants to stimulate reflection and discussion would have to rely solely and consistently on “apply and explain” – on the basis of a code that consists of a few but all the more concise principles. This would give companies the urgently needed scope for individual, tailor-made implementations, which they could then “explain” (so that they would, so to speak, fill the Code’s principles with life themselves).

This would also enable a completely new approach to reporting, which is why an increasing number of reporting experts are now working with the “Apply and Explain” principle. In this context, I recommend taking a look at the reform of the Corporate Governance Code in South Africa (“King IV”), which I have closely observed and taken into account in my draft.

The Commission is making things too easy for itself

A look at “King IV” also confirms that “Apply and Explain” comes from the monistic world of “one-tier boards”. The principle can therefore not be transferred with a stroke of the pen to our dualistic system with a Management Board and a Supervisory Board, as the Government Commission seems to assume.

We must rather “translate” the principle and make it manageable for our two-tier structure. So it’s not enough to just write the principle into the code. Rather, the Commission would have to engage in a broad dialogue with business instead of stalling such an important issue on the one-way street called “consultation”.

The current “Apply-and-Explain” debate is further proof of my thesis: What the codex wants to call itself is far from finished!

Any additions, comments, objections? I look forward to your feedback: dehnen@vard.de

Editorial by Peter H. Dehnen -> About the Person.