Financial Reporting Council publishes guidance for revised UK Corporate Governance Code

The Guidance is divided into five sections, mirroring  the structure of the 2024 Code and covering the new section aimed at supporting the effective management of board committees. We have set out the key features of the Guidance below.

Section 1: Board leadership and company purpose

This section covers board decision-making, culture and engagement with shareholders. The Guidance makes clear that boards need to consider how they carry out their role (both individually as directors and collectively as a board). The company should have a well-defined purpose to help it articulate its business model, strategy and culture. This purpose is supported by effective directors who act in a manner consistent with their statutory duties and encourage transparency and accountability.

The new Principle C of the 2024 Code sets out the expectation that boards demonstrate how their actions and observable outcomes align with the company's strategy. The Guidance supplements this with questions for boards to consider in relation to company objectives, as well as the decisions and actions to be taken in relation to those objectives.

Section 2: Division of responsibilities

This section covers the different roles within the board and the importance of each role in achieving good governance standards. For example, the Guidance sets out the chair's role as pivotal to creating the conditions for overall board effectiveness and shaping the boardroom. The chair should ensure the flow of accurate, high-quality information, the provision of adequate time to discuss the agenda and that the directors are aware of and discharge their statutory duties. 

Good practice guidance for successful management of board committees

In this new sub-section, the FRC sets out the importance of board committees in supporting the unitary function of the board with guidance covering the configuration and general approach to be taken by boards. Information on both risk committees and sustainability committees is also included, even though the 2024 Code does not formally require them.

Section 3: Composition, succession and evaluation

This section places emphasis on the importance of having the requisite breadth of skills and experience on the board and advises boards on how they can better consider recruitment practices and diversity and inclusion. The Guidance also discusses the importance of and approach to be taken on board performance reviews, including reporting the results of a board performance review and selecting an external board reviewer.

Section 4: Audit, risk and internal control

Audit

This section should be read alongside the FRC’s 'Audit Committees and the External Audit: Minimum Standard' (published in May 2023) in considering the role of audit committees. The Guidance emphasises that the audit committee has a particular role, independent of executive management, in ensuring the protection of shareholder interests on financial reporting and internal control matters.

Risk management

The Guidance prompts boards to consider how they might best discharge their role in determining and managing a company’s principal risks. It does not go as far as providing the procedures or framework a company could use to design and implement its risk management and internal control framework, since - as the FRC notes - each company's risk appetite will necessarily be different.

Internal controls

The Guidance also considers the new requirements in the 2024 Code for boards to monitor and review all material controls and make a declaration on their effectiveness. The Guidance confirms there is no framework that companies must follow or use in defining 'material controls' as the FRC does not consider its role to extend to prescribing what material controls might consist of for any particular company.

Section 5: Remuneration

Concentrating on the role of the remuneration committee in reviewing the remuneration of the workforce and non-executive directors, Provision 37 of the 2024 Code has been amended to provide that directors' contracts and documents covering director remuneration should include malus and clawback provisions. The Guidance recommends that the remuneration committee should exercise judgement when determining remuneration awards and that, in line with this, remuneration policies should provide for such discretion to operate in a way that it can override otherwise formulaic outcomes.

When will the 2024 Code and Guidance take effect?

The 2024 Code will apply to financial years commencing on or after 1 January 2025, with the 2018 version applying until then. In response to stakeholder feedback indicating that boards need more time to develop their approaches to internal controls, the 2024 Code requirement for a board declaration (Provision 29) will come into effect from 1 January 2026.

Further information about the FRC and the Guidance can be found on the FRC's website.