The revised UK Corporate Governance Code reflects significant changes from the former iteration in 2018, including a greater focus on ESG reporting and the role of the audit committee. It follows recommendations from the Kingman Review addressing audit and corporate governance, the government’s response to it, and the Financial Reporting Council’s own position paper in July 2022. Collectively, the changes aim to improve transparency and actively consider the roles of governance and audit.
The Code previously applied to premium listed firms, but the FCA’s consultation on Primary Market Effectiveness consolidates premium and standard listings into a single category. In short, this brings more companies into scope of the UK Corporate Governance Code. As such, some listed companies will need to adopt the Code from scratch, while others will need to carefully review their current processes to align with the new requirements.
UK Corporate Governance Code – the key changes
The Code proposes ten key changes, and in-scope firms must apply them to remain compliant:
1 Board declaration over material controls
The Board must declare the firm’s material controls over operations, reporting, and compliance. This includes commentary on effectiveness and material weaknesses, and the processes used to reach those conclusions.
2 Greater focus on the audit committee
The audit committee will face greater scrutiny and must follow a new audit and assurance policy (AAP) and a more rigorous external audit tender process. It must also meet new minimum standards including showing external auditors evidence of quality and the extent of challenge provided, and views of internal audit and auditees.
3 Contractual clauses for remuneration, malus and clawback
Director contracts will include details of remuneration, malus, and clawback. The remuneration committee’s annual report should state if it used these options in the last reporting period.
4 Ensuring directors’ availability
The annual report should list all significant director appointments, including how each one has sufficient time to undertake their role, considering their commitments to other organisations.
5 Building ESG into the strategy
The audit committee’s annual report should include details of any external assurance over ESG processes, and how remuneration policies include measures and targets for achieving ESG outcomes.
6 A greater focus on diversity and inclusion
The proposed updates to the UK Corporate Governance Code now explicitly reference inclusiveness and non-protected characteristics, and the Nominations Committee must include diversity and inclusion in its annual report. It aims to encourage companies to consider diversity beyond gender and ethnicity.
7 Building the right culture
The Board must report on how effectively the desired culture is embedded across the firm. Where there are shortcomings, it must gain assurance that remedial actions are in place.
8 Maintaining effective risk management
Firms must maintain effective risk management and control frameworks, including establishing the principle risks they're willing to accept.
9 Producing a resilience statement
Under new draft legislation, Public Interest Entities (PIEs) with more than 750 employees and a turnover of £750 million or more (the 750:750 rule), must produce a resilience statement. This includes details of risk and control frameworks and assurance over sustainability. In the annual report, the Board must state how it assesses the company’s future prospects, and the audit committee must explain any external assurances. Over time this may become best practice for firms regardless of whether they're in scope of the UK Corporate Governance Code.
10 Improving workforce engagement
Workforce policies should be aligned with company values and remuneration policies should be informed by workforce engagement.
What does the new Code look like?
Companies already in-scope of the UK Corporate Governance Code will need to embed the above changes, to remain compliant and promote effective governance. However, the Code will be a new requirement for many companies, and the key requirements are summarised below.
Board leadership and company purpose
The Board should ensure that the necessary resources, policies, and practices are in place for the company to meet its objectives and measure performance against them. Workforce policies should align with the company’s values and sustainably support long-term success. Boards must also assess and monitor company culture and report on how effectively the preferred culture has been embedded.
When reporting on its governance activity, the board should focus on outcomes to demonstrate the impact of governance practices and how the Code has been applied. If there are any areas of non-compliance with the Code, the Board should explain why.
The annual report must detail how ESG risks and opportunities can affect future business success, with notes on how these have been addressed. It should also consider how sustainable the current business model is, and how environmental and social matters could impact strategy, including climate ambition, and transition planning.
The Board must understand shareholder views, and the annual report should include outcomes of shareholder engagement during the reporting period. Companies also need a mechanism for the workforce to raise concerns in confidence and anonymously (if preferred). The Board must review the effectiveness of these arrangements and the associated reporting.
Division of responsibilities
Over-boarding is a concern and the annual report must list all significant director appointments, demonstrating how they'll have time to undertake their duties alongside commitments to other organisations. Any remedial actions should be detailed.
Composition, succession and evaluation
The Board should promote equal opportunity, and diversity and inclusion of protected characteristics and non-protected characteristics including cognitive and personal strengths.
In its annual evaluation, the Board must assess its performance, composition, diversity and how effectively members work together. The annual performance review should consider each director’s commitments to other organisations, and their ability to discharge their responsibilities effectively.
Annual Report of the nominations committee should describe work undertaken in the reporting period. This includes details of succession planning for the Board and senior management, considering both strategy and diversity and inclusion. It must also consider the effectiveness of the diversity and inclusion policy, including how they're factored into search and nomination procedures, and gender balance across senior management and direct reports. The report must also include details of the Board performance review has been conducted, the extent and type of external audit’s contact with the board (including outcomes of that interaction and how it has shaped Board composition).
Audit risk and internal controls
The Board must maintain an effective risk management and control framework, and use the annual report to describe emerging risks and explain how they're identified and managed. This includes the Board’s assessment of material controls including a declaration of whether the Board sees risk management as effective during the reporting period, its reasoning and a description of any material weaknesses and steps taken.
The UK Corporate Governance Code also aims to enhance the role of the audit committee, which is expected to develop and maintain the audit and assurance policy, follow the new Minimum Standard, and promote effective competition during the external audit tendering process. There should also be a policy regarding engagement of external auditors for non-audit services to ensure independence, and consider relevant regulations and ethical guidelines. The committee must also engage with stakeholders and shareholders on its role, external audit’s remit and the approach to the audit and assurance policy.
The annual report will include details of the audit committee’s work, including any significant issues related to narrative or non-financial reporting, such as sustainability, and how issues were addressed. It will also include assurance metrics over ESG metrics, where commissioned by the Board.
What is the FRC’s new minimum audit committee standard
Remuneration should be aligned to company performance, purpose and values, including long term ESG strategy. This should include safeguards against poor performance, such as malus and clawback clauses in directors' contracts. The remuneration committee’s annual report should state if these options have been applied over the reporting period or previous five years, minimum circumstances and in-scope period for their use. The annual report should also include details of shareholder and workforce engagement, and how this has impacted the company’s remuneration policies.
The proposed revisions to the UK Corporate Governance Code won’t introduce significant updates, and simply aim to improve transparency for both financial and non-financial topics. This will give shareholders (and other stakeholders) greater assurance over the company’s resilience and risk management, helping them to making more informed investment decisions.
Applying to accounting years commencing on or after 1 January 2025, in-scope firms must review and update their current policies and procedures to ensure compliance. For companies that are already in-scope, the changes will most likely be minimal, but companies that are applying the UK Corporate Governance Code for the first time may need to make significant changes to their governance and reporting processes.