In May 2023, the Financial Reporting Council (FRC) initiated a consultation on proposed revisions to the UK Corporate Governance Code (the Code). This came a year after the government recommended measures to rebuild confidence in governance, reporting, and auditing.
The FRC proposed changes mark the most substantial update to the Code in five years. These changes aim to address policy issues that were brought to the FRC's attention in response to the Department for Business, Energy and Industrial Strategy (BEIS) white paper, "Restoring trust in audit and corporate governance."
The FRC's goal is not to conduct a comprehensive evaluation of the current Code, but instead to make targeted changes that will establish a stronger framework to accomplish two objectives. The first is to enhance the effectiveness of the Code in promoting good corporate governance. The second is to facilitate better reporting on internal controls and board responsibilities. With these aims, the FRC has identified five main areas of change:
Continuous monitoring of internal controls and risk management
The proposed changes aim to enhance risk management and internal control reporting by placing an emphasis on continuous monitoring. To this aim, the FRC proposes to remove the previous requirement for boards to "establish procedures to manage risk and oversee the internal control framework". In its stead, the FRC proposes that the Directors of the Board include in its annual reports:
- a declaration about the reasonable effectiveness of the company's management and internal control systems, and an explanation of the basis for that declaration.
- a description of any significant weaknesses and emerging risks found during the review of these systems through the period up to the date of the annual report, an outline of the remedial actions, and the expected timeframe.
If the proposal is accepted, the accompanying guidance on 'Risk, Management, and Internal Controls' will be updated to include further clarification on definitions, assistance on reporting, evidence processes, and frameworks/standards for evaluating effectiveness.
An enhanced audit committee role
The Code’s proposed changes will enhance the responsibilities of audit committees. These changes will enable them to oversee better the company’s audit procedures and maintain positive relationships with external auditors. The aim is to ensure outcome-based reporting and uphold the integrity of the process. Moreover, audit committees will oversee financial and narrative reporting which now includes environment and sustainability objectives.
More emphasis on Environmental, Social, and Governance objectives
The proposed changes have the goal of placing more emphasis on Environmental, Social, and Governance targets, such as climate concerns and transition planning. Moreover, under the proposed changes these factors will play a more significant role in evaluating the company's strategy.
New disclosure requirements for Directors
Under the proposed changes, companies must include specific information on the Directors’ commitments, remuneration, and appointment in their Annual Reports and Accounts (ARA). This includes:
- details of significant Director appointments in other organisations and an explanation of how Directors effectively manage their commitments. This information will be used during the Board's annual performance review.
- an explanation of Directors' remuneration, including clawback provisions and their minimum conditions of application, along with the reasoning behind these choices. Companies must also disclose any usage of such provisions in the last reporting period and the past five years. Additionally, the remuneration committee will now need to include how the Director’s remuneration supports performance and ESG objectives, in addition to the existing focus on purpose, value, and long-term strategy alliance.
- information on initiatives promoting equal opportunities, diversity, and inclusion, covering both protected and non-protected characteristics, in appointments and succession plans.
New reporting requirements, the rule of 'comply or explain'
To adhere to the changes proposed in the Code, companies are required to create, execute, and uphold an Audit Assurance Policy (AAP). The AAP details should be included in the Annual Report and Accounts (ARA), along with an annual implementation report.
The FRC has suggested a basic standard for Audit Committees for FTSE 350 companies regarding external audits. This standard will apply to all companies governed by the Code. Non-FTSE 350 companies will follow a 'comply and explain' basis.
The consultation period will end on 13 September. The FRC plans to finalise the new Code by the end of this year, giving companies approximately a year to plan and prepare. The proposed application date for accounting years beginning on or after 1 January, 2025.
The Institute is gathering feedback and would be very grateful for input from members at one of our virtual roundtables on 14 August, from 11am to 12 noon or from 4pm to 5pm; or on 15 August from 4pm to 5pm. Please get in touch via policy@cgi.org.uk if you would like to attend one of these roundtables or contribute feedback to the Institute’s response -any time spent doing so will count towards CPD targets. You can find out more about the proposed revisions to the UK Corporate Governance Code in our article on the Governance and Compliance Magazine website.
