The Financial Reporting Council (FRC) has published an updated (2024) UK Corporate Governance Code (Code) and "non-prescriptive" Guidance. Aimed principally at UK Main Market Listed companies, the new Code will apply for financial years commencing on or after 1 January 2025, although a new disclosure in relation to the effectiveness of internal controls is being delayed to the following year to allow companies time to adapt.
Although not effective yet, we'd recommend making boards and their committees aware of the changes well before then. They are largely to address the FRC and shareholder concerns at calls for increased transparency and to address deficiencies in current reporting.
The changes are also far less extensive than the FRC originally proposed (see here). This is largely due to industry feedback on the scale and overlapping nature of multiple reporting requirements faced by business. In particular, proposals to introduce an annual resilience statement and triennial audit and assurance policy statement became unnecessary after the Government dropped enabling legislation.
Key revisions to the Code are summarised below.
A new principle designed to improve reporting
A new principle has been introduced that "Governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives. Where the board reports on departures from the Code’s provisions, it should provide a clear explanation."
The concept behind the second sentence is not new. The UK Corporate Governance Code comprises a number of high level 'principles' and more detailed 'provisions'. The Listing Rules require companies in their annual report to explain how the principles have been applied and then 'comply or explain' against their application of the provisions. Notwithstanding this, the FRC regularly undertakes review of corporate reporting and has found that – while over 50% companies have at least one departure from the code - many do not adequately explain why. Addressing criticism that the code had become regarded as prescriptive in nature, the FRC has also been at pains to stress its flexibility.
By including the first statement in this new principle, the FRC is also encouraging companies to take an "outcomes" focussed approach to reporting. The Guidance explains: "the Code places emphasis on the importance of outcome-based reporting without losing sight of the longer-term goals of sustainable value creation. Boards should demonstrate how the actions and other observable outcomes of their decisions align with the company’s strategy and objectives." The Guidance encourages boards to set out their objectives (taking into account stakeholder feedback), decisions, actions taken, and their impact. It also suggests using links to policies on its website to avoid repeating in annual reporting what does not change from year to year.
New internal controls effectiveness statement
Board responsibility to monitor and review (at least annually) the company's system of internal control, (covering all "material" controls, including financial, operational, reporting and compliance controls) is not new. The Board should now include in the annual report:
- a description of how the board has monitored and reviewed the effectiveness of the framework;
- a declaration of effectiveness of the material controls as at the balance sheet date; and
- a description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.
Audit Committee Minimum Standard
Provision 25 now states that a main role and responsibility of the audit committee is to follow its Minimum Standard: Audit committees and the external audit, thereby extending the application of this standard to all code reporting companies (and not just those in the FTSE 350).
Malus and Clawback of executive director remuneration
Provision 27 of the Code strengthens provisions relating to malus and clawback arrangements (arrangements allowing withholding or recovery of pay) by ensuring they are contained in legally binding contracts (not just in remuneration policies and share plan rules). In addition, provision 28 states the annual remuneration report should describe them, including the circumstances in which they could be used; the period for malus and clawback and why it is best suited to the organisation; and whether the provisions were used in the last reporting period (and if so, why).
Principle J has been amended to promote not only diversity, but also "inclusion and equal opportunity" but the list of diversity characteristics (gender, ethnic background, cognitive and personal strengths) has been removed. This intentionally underlines that diversity policies can be wide ranging. Indeed the Guidance states "With input from shareholders, boards need to decide which aspects of diversity are important in the context of the business and its needs". It goes on to suggest companies consider a number of actions to support diversity and gives examples of initiatives (such as The Parker Review and FTSE Women Leaders Review, to mention only a couple), whilst also stressing the importance of diversity of personal attributes.
The Guidance replaces three sets of guidance to the current (2018) code on: board effectiveness; audit committees; and risk management and internal controls.
The Guidance also for the first time has a section on the 'Successful Management of Board Committees', which covers not only the more traditional audit, remuneration and nomination committees included in the Code's provisions, but also risk and sustainability committees.