Consultation on Revised UK Corporate Governance Code

Last month (May 2023), the FRC issued a consultation draft on amendments to the UK corporate governance code for comment by 13 September 2023.

The UK corporate governance code was last published in 2018. The new Code will be effective for reporting periods starting on and after 1 January 2025.

The review arises in large part as a response to the government White Paper on “Restoring Trust in Audit and Corporate Governance”. But reflects other important things too.

The government White Paper does not recommend legislation on the reporting on internal controls. Instead, there is a proposed resilience statement and a requirement for an audit and assurance policy (“AAP”) for Public Interest Entities (“PIEs” - 750 employees or more and turnover of £750 million or more).

Some highlights of the Code draft changes:

• The FRC will transition into the Audit, Reporting and Governance Authority (ARGA). In part, the rebranding reflects the emphasis on internal control, assurance and resilience as defined beyond financial reporting alone. In other words, other operational and risk factors, such as ESG, fall fully within the ambit of narrative reporting, and need regulation

• Some proposed code changes relate to the proposed introduction of the new Audit Committee and External Audit Minimum Standard

• Others relate to concerns regarding directors' time, commitment and over boarding, a longstanding investor bug-bear, worsened by complexities of crypto security, AI issues and complex climate data. Do directors have the skills and time needed?

• The proposed code has strengthened disclosures on diversity and inclusion

• Good practice areas identified by the Chartered Governance Institute in 2021 are adopted, Including the chair commissioning (not considering) a board performance review

• ESG and sustainability "increasingly influence capital allocation decisions, and therefore need to be as reliable as financial information". And so, the audit committee is proposed to oversee, ESG disclosures, controls, processes, and assurance, and is to be given a new responsibility for monitoring the integrity of narrative reporting, including sustainability reporting

• The code changes also strengthen disclosures relating to internal control effectiveness, including the basis of statements made relating to ongoing internal control review

• Some Code changes strengthen the link between remuneration policy and a wider view of corporate performance, including ESG objectives

• Proposed Code items include stronger malice and clawback disclosures. Are they in place? Minimum conditions and periods for them to apply (and why that period is chosen) and if they have been used in the last five years

The FRC reports a marked rise in companies explaining, not complying, with the code. Of 100 leading companies surveyed in 2021, 58 complied in full, falling to 27 out of 100 in 2022. This emphasises that explanations of non-compliance must be clear to demonstrate good governance.

Given the proposed code widened scope, and the potential widened footprint of covered companies as the FCA consolidates listing categories, investors and others need to be attuned to the new normal of non-compliance explanation

Executive Compensation and Incentive Design

Reward and Share Plans 

Remuneration Advisory and Support

ESG and Sustainability

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Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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