On 22 January 2024, the FRC announced the publication of revisions to the 2018 UK Corporate Governance Code, with the intention of enhancing transparency and accountability of UK public companies and assisting in the growth and competitiveness of the UK and its attractiveness as an investment centre (FRC Press Release). Alongside a revised version of the UKCG Code (UKCG Code 2024), the FRC published certain supporting materials (Summary of key changes: UKCG Code 2024 and Myth buster: UKCG Code 2024).
The FRC has kept changes to the Code to a minimum, prioritising revisions in relation to internal controls. While the existing expectations in the Code will remain, boards will now be required to make a declaration in their annual reports concerning the effectiveness of their material internal controls. A small number of other more minor changes have also been made to the Code with the aim of streamlining the expectations or to clarify the language. These relate to Code provisions on malus and clawback and audit committee minimum standards.
Background
The FRC launched a consultation on proposed revisions to the UKCG Code in May 2023 (see FC Feature 24 May 2023), which focused on the legislative and governance reforms proposed by the government in its Response to the White Paper on restoring trust in audit and corporate governance (see FC Feature 31 May 2022).
In November 2023, the FRC issued an update stating that, having considered its own policy objectives as well as feedback to the consultation, it had decided to only proceed with a small number of its original proposals (see FC Feature 7 November 2023). The FRC dropped its earlier proposals for revisions to the Code relating to the role of audit committees on ESG issues, expanding diversity and inclusion expectations, over-boarding provisions and expectations on Committee Chairs' engagement with shareholders. The revised version of the Code reflects this policy decision.
The main changes to the Code in the 2024 version are as described below.
Section 1 – Board leadership and company purpose
The FRC has reframed Principle C in Section 1, which now states that companies should, when reporting on their governance activity, focus on board decisions and their outcomes in the context of the company's strategy and objectives. Where the board reports on departures from Code provisions, it should provide a clear explanation. Provision 2 has also been enhanced to state that the board should assess and monitor culture, including how the desired culture has been embedded.
Section 3 – Composition, succession and evaluation
The FRC's changes in Section 3 emphasise the importance of diversity and inclusion in a board's composition without introducing duplicative targets or regulations. Principle J has been amended to promote diversity, inclusion and equal opportunity (removing the list of factors previously provided) and Provision 23 has been updated to reflect the fact that companies may have further initiatives in place alongside their diversity and inclusion policy.
Section 4 – Audit, risk and internal control
Most of the revisions to the Code have been made in Section 4. Principle O has been amended to make the board responsible for not only establishing but also for maintaining the effectiveness of the risk management and internal control framework. In addition, Provisions 25 and 26 have been updated to reflect the publication of the Minimum Standard: Audit Committees and the External Audit (see FC Feature 22 May 2023) and to remove duplicative language. Provision 29 has also been significantly augmented, with boards now required to provide in the annual report a description of how they have monitored and reviewed the effectiveness of the internal control framework and a declaration concerning the effectiveness of material internal controls.
Section 5 – Remuneration
Amendments to Section 5 include the insertion of a new Provision 38 which asks companies to include in the annual report a description of its malus and clawback provisions.
Revised guidance
The revised Code will be supported by updated guidance, which the FRC aims to publish on 29 January 2024. In preparing the guidance, the FRC has taken expert advice from its Stakeholder Insight Group (see UKCG Code 2018: introduction and themes, Q&A here), which represents those with an interest in the Code such as preparers and investors. For further information on the current FRC guidance, see UKCG Code 2018: introduction and themes, Q&A here.
The FRC is also hosting two webinars on the revised Code, the first on 23 January 2024 (FRC Webinar: 23 January 2024) and a second on 30 January 2024 which focuses on internal controls (FRC Webinar: 30 January 2024).
Application date
The UKCG Code 2024 will apply to financial years commencing on or after 1 January 2025, with the 2018 version remaining in place until that time. In response to stakeholder feedback indicating that boards need more time to develop their approaches to internal controls, the new Code requirement for a board declaration (Provision 29) will come into effect from 1 January 2026, ie a year after the remainder of the Code.
First published on the Corporate News Service on 22 January 2024.
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