Proposed Changes to the UK Corporate Governance Code

This summer, the Financial Reporting Council (“FRC”) proposed several changes to the UK Corporate Governance Code (“CGC”) which will take effect for financial years starting on or after 1 January 2025. Although the principle of “comply or explain” remains unchanged, the FRC’s proposals may still force companies to comply with the CGC more indirectly, leaving less margin for explanation.

The FRC’s main suggestions fall broadly into three categories:

1. Risk Management & Disclosure;
2. Remuneration; and
3. Significant Appointments of Directors.

Risk Management and Disclosure

The FRC has targeted its risk management suggestions at Section 4 of the CGC: “Audit, Risk and Internal Control”. The FRC has proposed an expansion to Principle O of the CGC (which requires boards of directors to “establish” internal risk management procedures and safeguards), by suggesting that these measures are maintained.

Specifically, directors would be required to issue annual reports on the effectiveness of internal risk control and financial reporting procedures, which bears similarities to the requirements of the USA’s Sarbanes-Oxley Act.

Equally of note is the new “750:750” category of companies which have at least 750 employees and generate at least £750 million in revenue. Enhanced disclosure requirements concerning fraud and auditing for “750:750” companies are being drafted into legislation, with the expectation that these companies will be required to produce a specific Audit Assurance Policy”.

Remuneration

The FRC’s suggestions for executive remuneration are twofold:

• Firstly, it proposes that remuneration should be linked to a company’s implementation of ESG policies.
• Secondly, the FRC has proposed stronger sanctions and clawback measures relating to board remuneration. The following six considerations have been highlighted in determining the remuneration of directors whose conduct has fallen short of expectations: (i) material misstatement of results or erroneous performance calculations; (ii) material failure of risk management and internal controls; (iii) misconduct; (iv) conduct causing financial loss; (v) reputational damage; and (vi) failure to protect employees’ and customers’ interests.

Significant Appointments

Finally, the FRC has sought to strengthen Provision 15 of the CGC, which partially restricts directors’ appointments to other companies’ boards and requires disclosure of appointments which are permitted. The changes would require companies to list all of their board members’ significant appointments in their annual report. Each company’s annual report would also have to explain how directors can undertake their roles effectively, taking account of their other commitments.

At Edwin Coe, our Corporate department 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 or any member of the Corporate team.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now