Changes to the UK Corporate Governance Code

On 22 January 2024, the Financial Reporting Council (the “FRC”) published the revised UK Corporate Governance Code (the “Code”) which aims to enhance transparency and accountability amongst UK public listed companies and support the growth and competitiveness of the UK’s capital markets.

What is the Corporate Governance Code?

The Code is a regulation that outlines what good corporate governance should look like. It is organised around the following five principles:

1. Board leadership and company purpose;
2. Division of responsibilities;
3. Composition, succession, and evaluation;
4. Audit, risk, and internal control (“Internal Control”); and
5. Remuneration.

The Code is not law, but it does apply to all premium listed companies on the London Stock Exchange and the FRC expects that companies will “comply or explain,” which means they can either comply with the Code or explain why they have chosen to deviate from the Code’s requirements.

The UK is often seen as a global leader in good corporate governance, but it has attracted criticism from some who suggest that the UK’s stringent standards can stifle the attractiveness of the UK’s capital markets as a place to list or invest.

What has changed?

The FRC consulted on its proposed changes throughout 2023, which were expected to include changes to: social and governance issues, diversity and inclusion expectations, the role of audit committees on the environment, and internal controls (which we explained further in our blog of October 2023, which can be read here).

The FRC has announced that it has decided to keep its changes to the minimum necessary. It appears that the concern about maintaining the competitiveness of the UK’s capital markets, coupled with the uncertainty felt across the global equity capital markets in 2023, has led the FRC to prioritise keeping the burdens on businesses to a minimum.

The key changes are as follows:

Board leadership and company purpose

The boards governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives. In addition, boards are required not only to assess and monitor culture, but also consider how the desired culture has been embedded in the company.

Timeline: due to come into force on 1 January 2025.

Composition, succession and evaluation

The Code has been amended to promote diversity and inclusion without referencing specific groups, and to reflect the fact that companies can have additional initiatives in place alongside their diversity and inclusion policy.

Timeline: due to come into force on 1 January 2025.

Internal Control

The board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness. In the company’s annual report, the board should provide:

1.  a description of how the board has monitored and reviewed the effectiveness of the framework;
2.  a declaration of effectiveness of the material controls as at the balance sheet date; and
3.  a description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed to be taken, to improve them and any action taken to address previously reported issues.

Timeline: in order to give boards time to develop their approach, this provision will come into force on 1 January 2026.

Remuneration

There are new provisions to state that directors’ contracts or other agreements which cover director remuneration should include malus and clawback provisions. In the annual report, companies should include a description including:

1.  the circumstances in which malus and clawback provisions could be used;
2.  a description of the period for malus and clawback and why the selected period is best suited to the company; and
3.  whether the provisions were used in the last reporting period and, if so, a clear explanation of the reason should be provided in the annual report.

Timeline: due to come into force on 1 January 2025.

The Code also maintains the “comply or explain” principle, as it is thought that this provides companies with the required flexibility. The CEO of the FRC states:

“The FRC is clear that compliance can mean either complying with the Code provisions as set out or providing a cogent and justified explanation for why a provision is not suitable in the specific circumstances for the company whilst demonstrating the principles of good governance. Frankly, a good explanation illustrates better governance more than a situation where a Board defaults to compliance with a specific Code provision that manifestly doesn’t suit its circumstances but where the Board lacks the confidence to make the explanation.”

Reaction

Many have welcomed the fact that the FRC has significantly watered down its initial proposal. Last year, Julia Hoggett the chief executive of the London Stock Exchange suggested that many companies felt the Code had become “comply or else”. People that share this view will hopefully welcome the FRC’s restraint in introducing further regulations, in the hope that the UK becomes more attractive for investing capital and growing businesses.

Edwin Coe’s Corporate team frequently advises on corporate governance issues for both public and private companies. If you or your business require any assistance with corporate governance matters, please do not hesitate to contact Daniel Bellau, Katie Braddell or any other member of the Corporate team.

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