Proposed changes to the UK Corporate Governance Code

On 24 May 2023, the UK Financial Reporting Council (the FRC) launched a public consultation on the proposed changes to the UK Corporate Governance Code.

The current UK Corporate Governance Code sets out standards of good practice for listed companies.

Companies with a premium listing on the London Stock Exchange and the Euronext Dublin primary securities market must state in their annual report whether or not they have complied with the code and, if not, provide details of the provisions that were not followed and the reasons for non-compliance.

The proposed reforms by the FRC aim to restore faith in the auditing of listed firms and their corporate governance – while ensuring the quality and accuracy of information disclosed by corporations.

While the FRC does not intend to limit the number of appointments a director may hold, it does intend to include requirements that the annual board performance review takes into account each director’s commitments to other boards.

The FRC proposes to tweak specific principles rather than changing the structure of the code to enable increased and more focused disclosures.

The code will continue to operate under the “comply or explain” principle.

Some of the planned changes to the UK Corporate Governance Code are summarised below:

“Regarding reporting on governance activity, the FRC suggests a new concept that states that corporations should focus on outcomes to demonstrate the impact of their corporate governance practices,” says David W Duffy, CEO of the Corporate Governance Institute. 

The FRC has proposed measures to strengthen existing Code principles to ensure that those in leadership positions have enough time to devote to their responsibilities. This is in response to increased industry concern about the number of board positions held by executive and non-executive directors of listed companies in the UK.

While the FRC does not intend to limit the number of appointments a director may hold, it does intend to include requirements that the annual board performance review takes into account each director’s commitments to other boards, information about these other commitments, and how the directors intend to manage their time.

The need for diversity in senior management and on boards is already emphasised in the code. Nonetheless, the FRC seeks to reinforce current diversity standards by referencing “inclusion” in these principles.

The FRC suggests supplementing specific regulations with new reporting requirements on the nominating committee’s activity to provide greater transparency on a company’s executive nominations and succession planning approach.

The UK Government addressed intentions to implement an Audit and Assurance Policy for select UK corporations that fit within the new “public interest entity” classification in the 2022 consultation document ‘Restoring trust in audit and corporate governance’. 

While the AAP criteria will be outlined in rules and only apply to a subset of UK businesses, the FRC believes that all organisations reporting under the code should consider preparing an AAP on a “comply or explain” basis.

This will increase the audit committee’s reporting responsibilities and necessitate developing and maintaining an AAP.

The FRC is proposing various amendments that would give the audit committee increased authority over the integrity of narrative reporting, including sustainability reporting.

The audit committee would also be responsible for describing their work on narrative reporting in the company’s annual report under these proposed reforms.

The FRC also proposes Code amendments to increase board responsibility and reporting on internal controls.

The proposed revisions will require the board to declare whether they can reasonably conclude that the company’s risk management and internal controls systems were influential throughout the reporting period and to provide a basis for this assertion.

Boards will also be required to report on substantial deficiencies discovered in risk management and internal control systems.

The FRC recommends changes to reinforce the links between pay plans and overall corporate performance.

The proposed reforms emphasise the significance of openness in director remuneration, ensuring directors are not involved in deciding their pay, and the overriding goal of ensuring that these policies reflect the company’s performance, purpose, and values.

The deadline for comments on the proposed Code modifications is 13 September 2023, and the proposed revisions are expected to be implemented by 20 January 2025.

The FRC has also stated that it will amend the current audit committee and board effectiveness recommendations to align with the proposed Code reforms.

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