Financial Reporting Council publishes policy update regarding the UK Corporate Governance Code
On 7 November 2023 the Financial Reporting Council (the "FRC") published a policy update to its consultation published on 24 May 2023 (the "Consultation") on proposed changes to the UK Corporate Governance Code (the "Code"). The policy update also provides an insight into plans to review the UK Stewardship Code as well as reflecting on the contents of the King's Speech.
In the update, it was noted that in His Majesty's Speech to Parliament the government has not prioritised the primary legislation to modernise the regulation of audit, corporate reporting and governance for the next Parliamentary session. Whilst the FRC welcomes the government's restated commitment to reform and bring forward such legislation when time allows, it means that various measures forming part of the government's drive to restore trust in audit and corporate governance are effectively placed on hold.
In light of this development and having considered the full range of feedback received in response to the Consultation the FRC has decided to take forward only a small number of the original 18 proposals made in the Consultation.
Here to stay
- the FRC will retain but revise its original proposal regarding internal controls i.e. the basis on which companies report on, and evidence the effectiveness of, their internal control framework over the course of a reporting period; and
- there will be a small number of revisions to streamline and reduce duplication associated with the Code, since these were overwhelmingly supported by stakeholders.
The FRC will not be taking forward over half of the original proposals, including:
- those regarding the role of audit committees in relation to ESG reporting;
- modifications to existing Code provisions concerning diversity, over-boarding, and engagement by Committee Chairs with shareholders; and
- those affected by the government's decision to withdraw the draft Companies (Strategic Report and Directors' Report) (Amendment) Regulations 2023 (also known as the 'size-based public interest entities' enhanced reporting requirements)
When will we see a revised Code?
The FRC intends to publish an updated Code in January 2024.
The future of other governance measures
The Stakeholder Insight Group
During the Consultation, the FRC received feedback from certain stakeholders that some of the guidance issued under the Code can have unintended effects on businesses, investors and their advisers. To help ensure proportionate controls which limit burdens on stakeholders whilst not weakening effective governance, the FRC intends- from January 2024- to give an additional remit to its Stakeholder Insight Group: to provide the FRC with advice on how aspects of its current and planned guidance associated with the Code could be improved to ensure the right balance is struck. The Stakeholder Insight Group consists of investors, preparers, advisers and related membership bodies. It will report on this additional remit directly to the CEO of the FRC.
The Stewardship Code
During the Consultation, certain stakeholders expressed concerns about aspects of the UK Stewardship Code which is due to be reviewed by the FRC in 2024. The Stewardship Code has been confirmed a priority for the FRC once the updated Code is issued in early 2024.
Further information about the FRC and the Consultation can be found on the FRC's website.