Add a bookmark to get started

Abstract_Building_P_0036
13 February 20243 minute read

UK Corporate Governance Code Revisions: Balancing Controls, Context, and Flexibility

The Financial Reporting Council (FRC) unveiled revisions to the UK Corporate Governance Code on 22 January 2024. Coming into effect across 2025 and 2026, the revisions tighten requirements and accountability on internal controls, alongside introducing a small set of changes related to the Code provisions on malus and clawback and audit committee minimum standards.

These revisions are narrower than those proposed in the FRC’s policy statements. They sought to balance trepidation from directors on additional duties; a need for an effective response to recent corporate failures, and an attempt to counter sentiments that the UK is a hard place to conduct business.

Given this context, these changes appear to be a pragmatic response from the FRC. They represent a deliberate approach to strengthen accountability within UK corporate governance, while avoiding undue prescriptiveness and a further increased regulatory burden with no commensurate benefit.

 

Internal Controls

Companies are now required to declare the “effectiveness” of their material internal controls formally and annually – in other words moving beyond mere disclosure of what the controls are, towards an appraisal of how well they work. The provision states that the Board should declare ‘‘whether the company's internal controls, taken as a whole, are effective in providing reasonable assurance against the risk of misstatement of financial statements due to fraud or error."

The FRC avoids a one-size-fits-all approach, allowing companies the flexibility to tailor their internal control frameworks to their individual needs. In effect, directors have the power to determine what “effectiveness” means in their context, and if they are, therefore “effective”.

Nevertheless, this elevates the need to be transparent and to provide stakeholders with a clearer understanding of risk management practices. In addition to existing provisions, it continues to codify expectations that directors must oversee operational risk systematically alongside outward looking commercial factors. Simply, to meet the code, directors must lean-in deeper into their operations and therefore the associated risks, issues, and mitigations.

 

Other changes (and omissions)

Alongside, these revisions introduced some other smaller changes with a new requirement for listed companies to include remuneration clawback provisions in directors’ contracts from 2025. Companies will need to publish details of these clauses annually and explain their use in the preceding year.

Beyond the established “comply or explain” approach, the new code encourages companies to report on the “outcomes” achieved through their governance policies, rather than simply detailing the activities undertaken.

When looking at these revisions, the scale of omissions is notable as well. The FRC dropped its earlier proposals for revisions related to the role of audit committees on environmental, social and governance issues; expanding diversity and inclusion requirements; over-boarding provisions, and expectations on Committee Chairs’ engagement with shareholders.

 

Commentary

The revisions made are positive developments, but also gradual changes. Ultimately, they promote transparency, accountability, and an outcome-oriented approach, without resorting to prescriptive regulations. The preservation of the "comply or explain" approach acknowledges the diverse needs of different companies and sectors, promoting flexibility within a clear framework.

In part, the impact of these revisions will depend on how substantively they are implemented. Companies can interpret and apply the new requirements individually, balancing compliance, commercials, and context.

Stepping back, these changes – and omissions - are designed to make the UK a simpler, more ethical, and safer place to do business. The reality of UK corporate governance might be more nuanced than its "complex" reputation suggests, however perception often trumps truth. Until the broader business landscape undergoes a more substantial transformation, the lingering image of intricate regulations will persist. And while the FRC’s revisions show positive, pragmatic thinking, they are limited. This means their impact will be limited as well.

Print