The FRC's latest consultation, focussing on internal control, assurance and resilience, represents the latest indication of their intended direction of travel with regards the UK Corporate Governance Code, a benchmark (that sits alongside regulatory requirements) frequently used to assess the adequacy of governance frameworks at UK-listed firms.

The strengthening of the Code by the FRC, in alignment with its supervisory regulatory priorities - corporate reporting, climate risk and ESG, risk management, resilience - confirms the importance that the regulator has placed on companiesmaintaining an effective governance and controls framework. As a result, Board members and senior management will need to have increased focus on managing risk and developing resilience, including threats to business continuity, supply chain and cyber security. We also expect that there will be implications for firms and Boards that do not provide improved transparency to their investors within annual reports and other disclosures.

The FRC is looking to apply the revised Code to accounting periods commencing on or after 1st January 2025. Responses to the consultation document are requested by 13 September 2023.

Proposed changes to the existing Code

Whilst a number of key changes are being proposed, the FRC are seeking to maintain the clarity and structure of the existing Code. Below, we have summarised the key changes to each of the five core areas of the Code, highlighting pertinent areas for firms to consider as they continue to review their governance arrangements. The most significant proposed areas of change apply to Section 4 (Audit, Risk and Internal Control).

1. Board Leadership and Company Purpose

Most significantly within this section, the FRC has proposed introducing a further principle, setting out the expectation that companies should, when reporting on governance activity, focus on activities and outcomes to be able to demonstrate the impact of governance practices.

2. Division of Responsibilities

Rather than introduce a cap on the number of board appointments that may be held by UK-listed Board directors to adress investor concerns, the FRC is now making two proposals in this area:

  1. Specifying (within current Principle L) that the annual board performance review should consider each director's commitments to other organisations, including how directors are able to make sufficient time available to carry out their role effectively; and
  2. Specifying (within Provision 15) that annual reports should include more information on director's other commitments and how they manage these.

3. Composition, Succession and Evaluation

To support the regulatory focus and market initiatives in respect of diversity and inclusion, the following amendments are being proposed:

  • Including a reference to inclusion, and giving equal weight to all protected and non-protected characteristics, within current Principle J; and
  • Clarifying company approaches to succession planning and senior appointments within Provision 23, including the reporting of these arrangements.

The FRC are also seeking to clarify the duty of Chairpersons to commission (as opposed toconsider) board performance evaluations.

4.Audit, Risk and Internal Control.

The most substantial proposed changes to the Code are likely to feature within Section 4 on Audit Risk and Internal Control. In particular:

  • The FRC is proposing Code companies develop Audit and Assurance Policies, to be led by firms' audit committees;
  • Reflecting wider responsibilities of boards and audit committees for sustainability and ESG reporting, including the responsibility of audit committees for describing their work in this area, within firms' annual reports;
  • Enhancing boards' responsibilities for reporting to shareholders on their work to maintain effective risk management frameworks;
  • Including a new provision asking boards to declare whether they can reasonably conclude risk management and internal controls have been effective; and
  • Asking boards to explain in their annual reporting how it has assessed their firm's future prospects (e.g., via a Resilience Statement).

5. Remuneration

The FRC are proposing a number of amendments to the Code to strengthen the requirements of firms in respect of remuneration including:

  • Strengthening the links between companies' remuneration policies and broader corporate performance;
  • Emphasising the importance of transparency and the linkages with long-term sustainable success;
  • Considering wider workforce pay and conditions when determining executive pay;
  • Including details of malus and clawback provisions within remuneration reports; and
  • Probing as to how firms' executive remuneration structures support company strategy and ESG objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.