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UK Corporate Governance Code – FRC announces launch of consultation

Posted on 31 May 2023

On 24 May 2023, the Financial Reporting Council (the FRC) announced, as part of its larger audit and corporate governance reform programme, the start of a consultation on updates to the UK Corporate Governance Code (the Code).

This is the first time the FRC has proposed changes to the Code in almost six years. However, unlike their 2018 review, which made wide-ranging amendments, the consultation focusses on two main areas:

There is also a new focus on sustainability, including environmental and social risks and reporting. Alongside the Consultation Document, the FRC has also outlined plans to hold a series of roundtable discussions (on the topics of internal controls, boards and leadership) between June and July this year. Responses to the consultation are to be submitted by the 13 September 2023, with the finalised Code applying for financial years commencing on or after 1 January 2025.

What are the FRC's proposed changes?

Changes have been made to each of the five sections of the Code, highlights of which we set out below.

Section 1 – Board leadership and company purpose


These clarify and adjust the Principles and Provisions to address weaknesses highlighted during the FRC's ongoing research and analysis of reporting over the past three years.

The most significant change is the introduction of a new Principle, which states that in their governance reporting the board should focus on the 'outcomes in order to demonstrate the impact of governance practices and how the code has been applied'.

Section 2 - Division of responsibilities

These changes address increasing investor concerns around the number of board positions held by executive and non-executive directors. Whilst the proposed changes do not go as far as to stipulate a maximum number of appointments, they specify: that companies' annual board performance reviews (see below) should consider directors' other commitments and whether they are able to devote sufficient time to discharge their role effectively; and that the annual report should include more detail on directors' other commitments and how they manage them.

Section 3 – Composition, succession and evaluation

The majority of the changes here are aimed at strengthening the Code's existing provisions on diversity and inclusion at board level, in executive management and in succession planning.  The FRC aims to avoid duplication and facilitate a more joined up approach in an already 'complex landscape' of regulation (e.g. the Financial Conduct Authority's Policy Statement and Listing Rules target reporting for women and ethnic minority board representation).

The FRC will also publish revised guidance on reporting on board performance reviews, taking into account the Chartered Governance Institute's review of the effectiveness of independent board evaluation in the UK listed sector

Section 4 – Audit, risk and internal control

The largest number of proposed changes are to section 4 of the Code. They include amendments which the FRC were invited to make by the Government under the "Restoring Trust in Audit and Corporate Governance" paper, and take account of proposed legislation expected to introduce new requirements for 'Public Interest Entities' or 'PIEs' (as explained in our Significant change article).  They cover:

  1. Audit and Assurance Policy – once enacted, legislation will require PIEs to include in their annual report a triennial audit and assurance policy and annual implementation report.  The FRC proposes to extend this to all Code companies (not just PIEs) on a 'comply or explain' basis;
  2. FRC Minimum Standard for Audit Committees in relation to the External Audit – provisions in the Code will make it the audit committee's responsibility to follow and report on this minimum standard, effectively extending it beyond FTSE 350 companies on a 'comply or explain' basis;
  3. Risk Management and Internal Controls – Having found reporting on the effectiveness and ongoing monitoring of risk management and internal control annual reporting to be weak, the FRC is strengthening the Code and adding further detail on what this reporting should cover. The FRC will also be updating its board Guidance on Risk Management, Internal Control and Related Financial and Business Reporting;
  4. Resilience Statement – the Code's provision on the board's assessment of the company's future prospects and ability to meet its debts (so called 'viability statement') is to be tweaked to anticipate the Government's proposed new "resilience statement"; and
  5. Sustainability – The FRC proposes the audit committee monitor the integrity of narrative reporting including sustainability reporting and describe its work in the annual report (where these matters have not been reserved for the board). Where commissioned by the company, the annual report should describe assurance of ESG metrics and other sustainability-related information.
Section 5 – Remuneration

The changes to the Principles at section 5 include a new Principle to strengthen the connection between remuneration policies and a company's overall corporate performance, with an increased emphasis on environmental, social and governance (ESG) factors.

They also address the Government's concerns regarding malus and clawback arrangements (arrangements allowing withholding or recovery of pay), for example, introducing new information to be included in companies' remuneration reports.

Other matters for consideration

Finally, the FRC highlights the growing importance of AI and the Government's March 2023 White Paper which proposes that existing regulators implement a new regulatory framework. The FRC invites views as to whether Code changes would be needed should the Government implement its plans.

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