FRC announces targeted consultation on UK Corporate Governance Code

Yesterday, the Financial Reporting Council published its public consultation paper on proposed 'targeted' revisions to the UK Corporate Governance Code (Code). 

Approach to the changes

The proposed revisions to the Code are technical rather than structural, with no changes proposed to the approach of a principles-based framework, or the 'comply or explain' underpinning of the Code.

Although amendments are proposed to all five sections of the Code, most of the changes are in section 4 (Audit, Risk and Internal Control). This means that, unlike the last wide-ranging review of the Code in 2018, the FRC has focused this consultation on the legislative and governance reforms which support the FRC's transition into the Audit, Reporting and Governance Authority and reflect the government's underlying agenda of Restoring Trust in Audit and Corporate Governance.

Main proposed changes

The main proposed changes:

• Concern those parts of the Code which deal with the need for a more robust framework of prudent and effective risk management and internal control. Changes here are concerned with providing a stronger basis for reporting on, and evidencing the effectiveness of, the framework during a reporting period.
• Reflect the wider responsibilities of the board and audit committee for expanded ESG reporting and, where commissioned by the company, appropriate assurance in accordance with a company's audit and assurance policy.
• Attempt to remove duplication by referring to the Audit Committee and External Audit: Minimum Standard whilst highlighting the importance of audit tendering in the context of expanding audit market diversity.
• Contemplate the requirement for the new category of Public Interest Entities (PIEs) - i.e. those with 750 or more employees and a turnover of £750m or more - to produce a Resilience Statement. This has implications for the current Code Provisions dealing with going concern and 'viability' statements given that there will be a cohort of companies to whom the Code applies but to whom the prospective legislative requirement to produce a Resilience Statement will not. The consultation notes that the draft legislation to bring such Resilience Statements and other reporting requirements forward (including in relation to distributable reserves and fraud prevention) is 'being prepared'.
• Deal with those areas where the FRC believe that current reporting can be improved, as identified in its Review of Corporate Governance Reporting. Where reporting is weaker, including in relation to reporting on corporate culture, the FRC proposes adapted Code Provisions. A new Code Principle is also proposed in section 1 to emphasise that reporting should demonstrate the outcomes of governance activities where possible.
• Further strengthen the Code on the issue of diversity and inclusion.
• Focus the Code further on director time commitments and the issue of over-boarding as well as on certain remuneration-related issues including malus and clawback and the refinement of remuneration reporting generally.

The revised Code will be supported by updated guidance, including updated Guidance on Audit Committees and Guidance on Board Effectiveness to follow once the Code changes have settled. The FRC will also amend the Guidance on Risk Management, Internal Control and Related Financial and  Business Reporting specifically to take account of changes to Principles and Provisions on risk management and internal control.

Consultation process and implementation

The consultation helpfully includes a tracked draft revised Code, as well as a clean version and a summary of draft secondary legislation on corporate reporting for 'new' PIEs.

As part of its market engagement, the FRC will host a series of roundtables throughout the consultation period. These will focus on three main topics:

• Internal controls (including the Resilience Statement and viability, and risk management and internal controls).
• Boards (including diversity and over-boarding).
• Leadership and reporting (including sustainability, culture, strategy, and reporting on 'impacts and outcomes').

The schedule for these roundtables and how to apply can be found here. 

Responses to the consultation must be submitted by 13 September 2023. The revised Code is expected to apply to reporting periods beginning on or after 1 January 2025.

Ashurst comment

The targeted approach taken by the consultation is to be welcomed given the extent of other government reforms which companies, particularly 'new' PIEs, will need to assimilate on the same timetable. Given that the FCA's listing regime reforms include a proposal to create a single listing segment which will create a new cohort of companies which must apply the Code for the first time, the FRC's focus on streamlining its content, removing duplication and adding practicality will also be helpful.

We look forward to engaging with clients on the proposals with a view to shaping our and their responses to the consultation.

We will publish further, more detailed, overviews and commentary in due course to help in that process.