The Financial Reporting Council (FRC), the regulator for the UK audit industry, recently released the first update to the Corporate Governance Code (“the Code”) since 2018. The Code is applicable to all premium listed companies and is the UK's key benchmark for best corporate governance practice.
What’s changing?
The FRC describes the 2024 revision of the Code as "limited", with a particular focus on internal controls. The key change is the amendment of Principle O in the audit, risk, and internal control section of the Code to reflect that the board is responsible not only for establishing but also for maintaining the effectiveness of the risk management and internal control framework.
This is supported by a new Provision 29 that states:
The board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness. The monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. The board should provide in the annual report:
- A description of how the board has monitored and reviewed the effectiveness of the framework;
- A declaration of effectiveness of the material controls as at the balance sheet date; and
- A description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.
It is of course for the board to interpret and apply the Code based on the circumstances of their particular company. For example, what constitutes "material controls" may vary from one company to another.
Other less significant updates to the Code include:
- a new Principle C on governance reporting;
- amendments to Principle J in relation to the promotion of diversity, inclusion, and equal opportunities;
- the amendment of Provision 37; and
- the inclusion of a new Provision 38, in relation to malus and clawback of directors' remuneration.
The FRC has also published updated guidance to assist companies with the application of the Code.
The FRC has confirmed that this guidance is not “more rules by the back door” and does not dictate how to apply the Code (noting, in any case, that there is no single way to apply the principles and comply with, or explain against, the Code’s provisions) but is instead intended to encourage boards to consider how to carry out their role most effectively.
When does the revised Code come into effect?
The amended Principle O and most other changes to the Code take effect from 1 January 2025.
The new Provision 29 of the Code comes into effect for financial periods beginning on or after 1 January 2026 to give companies sufficient time to develop their approaches to the new provision.
Why are these changes being made now?
The 2024 revision of the Code was finalised following a period of consultation by the FRC.
Originally, more changes had been planned but were scaled back when the government decided against prioritising reform of the audit and the corporate governance regulatory regime in its legislative programme for the next session of parliament. These legislative reforms have been under consideration since a series of reviews were published in 2018 and 2019 in the wake of Carillion, Patisserie Valerie, and other corporate scandals. The government has stated that it is still committed to these reforms, when parliamentary time allows.
What else do I need to know?
The FRC remains committed to the "comply or explain" basis upon which the Code operates.
This means that the Code is not rigid: companies can choose to depart from its provisions should they consider that such departure better suits their interests, provided that an adequate explanation is offered to shareholders and other stakeholders.
For further advice on the Code or on corporate governance more generally, please contact a member of the Shepherd and Wedderburn corporate team.