The Financial Reporting Council (FRC) has published an updated UK Corporate Governance Code (the Code), most of which will take effect from 1 January 2025. These revisions will replace the current version of the Code published in 2018.
As foreshadowed in its November 2023 statement, the FRC has taken forward only a small number of changes, with the final product falling far short of the Sarbanes-Oxley style compliance originally outlined in its May 2023 consultation. The published changes to the Code are targeted and minimal, aimed at striking a balance between enhancing transparency and investor confidence whilst supporting UK economic growth and competitiveness.
A primary focus is internal controls – with boards now being required to make an annual declaration concerning the effectiveness of their companies’ material controls. A small number of additional minor changes have been introduced in order to better streamline expectations, clarify language or remove duplication.
The Code will retain the flexibility of the current “comply or explain” policy, allowing directors to tailor governance practices to the specific circumstances of each company.
A summary of the key changes to the Code is below.
- Section 1 – Board leadership and company purpose:A new Principal C has been introduced, providing that boards should report on the outcomes of their decisions in the context of the company’s strategy and objectives. Where boards report on departures from the Code’s provisions, they should provide a clear explanation. Provision 2 has also been extended to include that boards should not only assess and monitor company culture, but also how the desired culture has been embedded.
- Section 3 – Composition, succession and evaluation: Principal J has been amended to require board appointments and succession plans to promote diversity, inclusion and equal opportunity, replacing the previous language which specifically referenced gender, social and ethnic backgrounds and cognitive and personal strengths. The list of diversity characteristics has been removed to indicate that diversity policies can be wide-ranging, and the revised guidance (see further below) says that boards, with shareholder input, need to decide which aspects of diversity are important in the context of the business and its needs. The content of the recommended annual report on the work of the nomination committee has also been expanded to include a description of diversity and inclusion initiatives (alongside any diversity and inclusion policy).
- Section 4 – Risk management and internal controls:Principal O has been amended to require boards not only to establish but to maintain an effective risk management and internal control framework. Most significantly, Provision 29 has also been extended to require boards to provide in the annual report a description of how they have monitored and reviewed the effectiveness of the internal control framework. This must be accompanied by a declaration of the effectiveness of the material controls and a description of any material controls which have not operated effectively. In its press release accompanying the revised Code, the FRC stated that it is for the board to decide what internal controls should be considered material, recognising that the needs for each business may vary. In addition, Provisions 25 and 26 have been updated to reflect the Audit Committees and the External Audit: Minimum Standard and remove duplicative language.
- Section 5 – Remuneration: Provision 37 has been amended to provide that directors’ contracts and any other agreements or documents which cover director remuneration should include malus and clawback provisions. In addition, a new Provision 38 has been introduced, asking companies to publish details of these provisions in their annual remuneration report, including the circumstances and the periods in which these provisions could be used and why the relevant period is best suited to the company, and to explain whether and, if so, why they were used in the past year. The FRC has confirmed in its technical Q&A that such disclosures should focus on executive directors.
The Code applies to all companies with a premium listing, whether incorporated in the UK or elsewhere. The Code’s “comply or explain” regime will also apply to the new “single listing” category for shares of commercial companies (once the “premium” and “standard” categories are merged), as contemplated by the FCA’s December 2023 listing reform consultation. The new listing regime is expected to come into effect in July 2024.
The 2024 revisions will apply to financial years beginning on or after 1 January 2025. However, companies will have an additional year to comply with the new reporting requirement concerning internal controls (Provision 29), which will apply for financial years beginning on or after 1 January 2026.
The FRC published a revised guidance on the updated Code on 29 January 2024. The guidance is not prescriptive, but provides a collection of advice, further detail and examples designed to aid boards with their actions and decisions when applying the Code.