What’s changed and what’s new in the revised UK Corporate Governance Code?
After the UK Government scrapped its audit reform programme in November last year, the planned changes to the UK Corporate Governance Code – many of which were tailored to reflect aspects of the proposed legislation – were left in doubt. On 22nd January, the FRC published the 2024 UK Corporate Governance Code, which now provides direction for UK companies.
As expected, the published changes are less wide-ranging than those initially proposed to reflect audit reform legislation. The FRC had already communicated that it planned to scrap alterations to the role of audit committees on environmental and social governance (ESG), and modifications to existing code provisions around diversity, overboarding, and Committee Chairs engaging with stakeholders.
The FRC echoes the government’s earlier line on ensuring that businesses are not overburdened by compliance pressure and has prioritised striking a balance between “UK competitiveness and positive outcomes for companies, investors, and the wider public”. As such, the code retains its comply-or-explain principle.
Directors have new accountability for internal controls
The FRC had already indicated that proposed amendments to internal controls obligations would remain part of the code revisions, and so it has proved.
Boards are now responsible for not only establishing a risk management and internal control framework, but also for maintaining its effectiveness. Provision 29 of the code is new, and states that monitoring and review of the effectiveness of risk management and internal control framework must take place annually, covering all material controls.
In annual reports, Directors must describe how they have conducted this review, make a declaration of the effectiveness of the material controls at the balance sheet date, and describe any controls that have not operated effectively. This must be accompanied by a description of actions taken, or proposed, to improve the controls.
The FRC says “Provision 29 builds upon existing Code expectations and recognises the increasing importance non-financial disclosures hold for many companies.”
While the effective date for reporting on the majority of changes to the code is financial years beginning 1 January 2025, Provision 29 will not apply until 1 January 2026. This reflects the work that companies will need to undertake to ensure that boards have sufficient assurance over the effectiveness of their internal controls environment.
Leadership and company purpose
The code introduces a principle requiring governance reporting to focus on board decisions and their outcomes in the context of the company’s strategy and objectives, explaining clearly if the board reports on departures from the code’s provisions.
The issue of ensuring culture is not just top-dressing is addressed in changes to provision 2. Boards must now also report on how the company’s desired culture has been embedded in their organisation, as well as assessing and monitoring it. Talking to the Fintech Times, Ian Peter, director of the Institute of Business Ethics said: ““This means that boards should go further than just assessing and monitoring culture but take concrete steps to ensure the desired culture is implemented effectively and that people across the organisation embrace ethical values and live by them.”
In terms of board appointments and composition, there are slight revisions to language on diversity, inclusion and equal opportunity, to remove specific lists of diversity characteristics, allow for additional diversity initiatives in reporting the work of the nomination committee, and acknowledge that “diversity policies can be wide-ranging”.
The other changes see board evaluation now referred to as “board performance review”, and introduce a requirement to include malus and clawback provisions in director contracts. Businesses must report annually on the circumstances in which these might be invoked, the rationale for the time period selected, whether they have been used in the last reporting period, and why.
Overall, these changes are very much evolution, not revolution, and are a long way from the sweeping changes that would have accompanied UK audit reform. However, there will still be some work to do for companies to ensure they are prepared for reporting from 1 January 2025.
The FRC will publish its official guidance for companies on 29th January 2024, which will provide more direction, particularly around the new internal controls provision.
