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Governance Authority
Category: Governance Codes and Frameworks

Apply and Explain

Simply put

Apply and Explain is an approach to corporate governance disclosure in which a company is expected to apply a set of governance principles and then explain in its reporting how it has done so. Unlike a simple pass/fail approach, it asks companies to describe the practical steps taken rather than just confirm they followed a rule. It sits alongside related disclosure approaches such as 'comply or explain' and 'apply or explain'.

Formal definition

Apply and Explain is a governance disclosure and flexibility mechanism, generally associated with principles-based codes rather than binding law, under which an entity is expected to apply stated governance principles and provide a narrative explanation of how the application has been achieved in practice. It differs conceptually from 'comply or explain' (where a company either complies with a provision or explains any deviation) and 'apply or explain' (which permits explanation in lieu of application), by presuming application while still requiring disclosure of the manner of application. The specific status, content requirements, and enforceability of an apply-and-explain regime vary by jurisdiction and by the particular code or listing regime adopting it; this entry describes the general concept and is educational, not legal or compliance advice.

Why it matters

The way a company is expected to disclose its governance practices shapes the quality and usefulness of that disclosure. Under a simple pass/fail or rules-based approach, a company can confirm that it followed a rule without conveying anything about how governance actually operates in practice. Apply and Explain shifts the emphasis from confirmation to demonstration: the presumption is that the entity applies the stated principles, and the disclosure is expected to describe the practical manner of that application. For boards, investors, and other stakeholders, this narrative can offer a more meaningful basis for judging governance quality than a binary tick-box statement.

Apply and Explain is one of several disclosure and flexibility mechanisms studied in the governance literature, alongside 'comply or explain' and 'apply or explain'. These approaches are generally associated with principles-based codes rather than binding statute, and they reflect a broader philosophy of allowing markets and stakeholders to assess whether a company's governance choices are appropriate to its circumstances. The distinctions between the three are not merely semantic: they change what a company is presumed to have done and what it must therefore explain. Confusing them can lead to disclosures that either overstate compliance or fail to give readers the information the regime intends.

Because the status, content requirements, and enforceability of an apply-and-explain regime vary by jurisdiction and by the particular code or listing regime that adopts it, the practical weight of the approach depends heavily on context. Whether a company treats the explanation as a genuine account of its governance or as boilerplate can materially affect how investors and regulators perceive the credibility of its reporting. This entry describes the general concept and is educational, not legal, audit, or compliance advice.

Who it's relevant to

Boards and their governance committees
Boards responsible for approving governance disclosures need to understand the presumption embedded in an apply-and-explain regime, that the company applies the relevant principles, and to ensure the accompanying explanation genuinely reflects the entity's practices. Where a nomination, audit, or governance committee oversees disclosure, it should be alert to the distinction from comply-or-explain and apply-or-explain approaches, as the disclosure obligation differs.
General counsel and company secretaries
Those responsible for corporate reporting and compliance with the applicable code or listing regime must confirm which disclosure mechanism applies in their jurisdiction and how the code defines the required narrative. Because status and enforceability vary by regime, they play a key role in ensuring explanations meet the specific content expectations rather than defaulting to boilerplate.
Investors and other stakeholders
Investors and stakeholders who rely on governance disclosures to assess a company benefit from the narrative that apply and explain is intended to produce. The approach is consistent with the broader principle of letting the market judge whether a company's governance arrangements are appropriate, so these readers are the intended audience for the explanations and a primary source of the scrutiny that gives the mechanism effect.
Governance and compliance professionals
Practitioners advising on or benchmarking governance reporting need to distinguish carefully among comply or explain, apply or explain, and apply and explain, since each carries a different presumption about what the company has done. Understanding these distinctions helps them advise accurately on the disclosure a given code requires, while recognising that the specifics turn on the applicable jurisdiction and regime.

Inside Apply and Explain

Apply Component
The expectation that an entity conforms to a set of governance provisions or principles. Under an 'apply and explain' approach, the entity generally states how it has applied the relevant principles rather than merely asserting compliance, shifting the emphasis from a binary tick-box to a demonstration of practice.
Explain Component
The narrative disclosure through which the entity describes how principles have been given effect, and the reasoning behind the specific practices adopted. This narrative is typically the primary vehicle for accountability under this model.
Principles-Based Orientation
'Apply and explain' is generally associated with principles-based regimes rather than rules-based ones. It assumes that outcomes and the substance of governance matter more than uniform adherence to prescriptive rules, allowing practices to be tailored to entity size, sector, and circumstances.
Distinction from 'Comply or Explain'
'Apply and explain' differs from the more familiar 'comply or explain' model. Under comply or explain, an entity may depart from a provision provided it explains the departure. Under apply and explain, the expectation is that principles are applied in all cases, with the explanation directed at how they were applied rather than at justifying non-compliance.
Voluntary or Framework-Based Status
Where adopted, 'apply and explain' typically operates through a governance code or framework rather than binding statute. Whether it applies, and to which entities, depends on the jurisdiction, the relevant code, listing rules, and entity type; it is not a universal legal requirement.
Accountability and Oversight Interface
The board generally holds responsibility for the quality and integrity of the explanation, as an oversight and disclosure matter, while management typically supports the underlying practices and the preparation of the narrative. The allocation of these roles depends on the entity's governance arrangements.

Common questions

Answers to the questions practitioners most commonly ask about Apply and Explain.

Does 'apply and explain' mean a company can simply opt out of governance principles by explaining why it did not follow them?
No. This is a common misconception. Under an 'apply and explain' approach, the principles are generally treated as the accepted standard of good governance, and the entity is expected to apply them. What differs from a strict rules-based regime is that the entity explains how it has applied each principle, rather than merely confirming compliance or providing reasons for departure. The emphasis is on demonstrating the substance of application through the entity's own narrative, not on justifying non-application. This should not be confused with 'comply or explain,' where departure from a specific provision can be acceptable if adequately explained. The precise expectations depend on the applicable code and jurisdiction, and this entry is educational rather than legal advice.
Is 'apply and explain' a legally binding requirement that carries penalties for non-conformance?
Not inherently. 'Apply and explain' is typically a feature of a governance code or framework, which is generally a non-binding standard rather than binding statute or regulation. However, whether it becomes mandatory in practice can depend on the mechanism used to give the code effect, for example, a listing rule may require listed entities to report against a code, in which case the reporting obligation itself may be enforceable even though the underlying principles remain principles-based. The extent of any obligation, and any consequence for inadequate disclosure, varies by jurisdiction, listing venue, and entity type. This entry is educational and does not constitute legal, audit, or compliance advice.
Who within the entity is typically accountable for preparing 'apply and explain' disclosures?
Accountability for governance reporting generally rests with the board, which oversees the integrity of the entity's disclosures, while management typically prepares the underlying narrative and gathers supporting information. The company secretary or governance function often coordinates the drafting process. It is important to preserve the distinction between the board's oversight role and management's operational role: the board is generally responsible for approving and standing behind the explanation, not for authoring every detail. Allocation of these responsibilities can vary by entity and jurisdiction.
How can an entity demonstrate that it has genuinely applied a principle rather than offering boilerplate language?
An effective 'apply and explain' disclosure generally focuses on specific, entity-relevant narrative describing how the principle was put into practice during the reporting period, for example, the arrangements, processes, or decisions that give effect to it, rather than restating the principle itself. Generic or templated wording tends to undermine the objective of the approach, which is to give stakeholders insight into the entity's actual governance. Where practices are still developing, entities generally explain their current position and intended direction transparently. What constitutes a sufficient explanation depends on the applicable code and the entity's own facts and judgment.
How does 'apply and explain' interact with an entity's assurance and internal audit functions?
Assurance functions such as internal audit may provide the board with independent perspective on whether governance processes described in the disclosure are operating as represented, though the nature and scope of any assurance over governance narrative varies and is not always formally required. It is important to distinguish design from operation: an explanation may describe how a governance arrangement is designed, while assurance activity may test whether it operates effectively in practice. Any external assurance over such disclosures depends on the applicable framework, engagement scope, and jurisdiction, and should not be assumed.
What practical steps help an entity maintain consistency in 'apply and explain' reporting over successive periods?
Entities generally benefit from maintaining a structured record of how each principle is applied, updated as arrangements change, so that year-on-year disclosures reflect actual developments rather than repeated wording. Periodic review by the governance function and the board typically helps identify areas where application has strengthened, changed, or requires attention. Aligning the narrative with other parts of the annual report and with the entity's actual practices supports coherence. The appropriate cadence and depth of review depend on the applicable code, the entity's size and complexity, and professional judgment; this entry is educational and not a substitute for advice tailored to the entity's circumstances.

Common misconceptions

'Apply and explain' is the same as 'comply or explain'.
They are related but distinct disclosure approaches. 'Comply or explain' permits departure from a provision with an explanation for the departure, whereas 'apply and explain' generally expects the principles to be applied and asks the entity to explain how. The nuance matters, and the precise expectations depend on the specific code or framework in the relevant jurisdiction.
'Apply and explain' is a legally binding requirement everywhere.
Where it exists, it typically operates through a governance code or framework and may be linked to listing rules rather than being a freestanding statutory obligation. Whether and how it applies varies by jurisdiction, sector, and entity type, so practitioners should confirm the source and force of the obligation in their own context.
A well-drafted explanation is sufficient to satisfy the model.
The approach generally emphasises the substance of how principles are actually applied, not narrative quality alone. A polished explanation that does not reflect genuine underlying practice may not meet the intent of the model and could raise credibility or oversight concerns.

Best practices

Confirm the source and legal force of the 'apply and explain' obligation in your jurisdiction and for your entity type before relying on it, distinguishing binding listing rules from voluntary code provisions.
Draft explanations that describe how each principle has been given effect in practice, rather than restating the principle or asserting bare compliance.
Ensure the narrative reflects the actual governance arrangements in place, so that the explanation is substantively accurate and not merely presentational.
Clarify internally which activities sit with the board as an oversight and disclosure matter and which sit with management in supporting and preparing the underlying practices.
Tailor disclosures to the entity's size, sector, and circumstances, consistent with the principles-based orientation, rather than adopting generic boilerplate.
Review explanations against the specific expectations of the applicable code or framework, and seek qualified professional advice where the required level of disclosure is uncertain, as these entries are educational and not legal, audit, or compliance advice.