Joint Working Party responds to the Financial Reporting Council's consultation on changes to the UK Corporate Governance Code

Joint Working Party responds to the Financial Reporting Council's consultation on changes to the UK Corporate Governance Code

On 21 September 2023, the City of London Law Society (“CLLS”) published a response dated 13 September 2023 (the "Response") submitted by a joint working party of the Company Law Committees of the CLLS and the Law Society (together, the "JWP") to the Financial Reporting Council's (the "FRC") consultation on their proposed changes to the UK Corporate Governance Code (the "Code"). The views of the CLLS ESG Committee and the Law Society Climate Change Working Group were also contained in the Response. The JWP consists of senior corporate lawyers from the CLLS and Law Society who specialise in equity capital markets. The Chartered Governance Institute (the "CGI") also published their response to the same consultation on 20 September 2023.

JWP responses to proposed changes

Within its Response, the JWP made the following key points in respect of proposed amendments:

  1. "Comply or explain" dilution?

    The JWP emphasises the importance of 'comply or explain' as a cornerstone of the Code's effectiveness. Some proposed amendments to the Code would introduce new requirements as 'Principles' (which companies must apply) as opposed to 'Provisions' (against which companies have the option of 'comply or explain'), undermining the 'comply or explain' principle and reducing the flexibility afforded to companies to adopt an alternative approach whilst still ensuring effective governance consistent with the Code's Principles.   

  2. Duplication risks confusion

    The JWP notes that several proposed amendments to the Code are already addressed by other legislation and if introduced would exacerbate the existing burden on companies to report in accordance with non-financial reporting requirements. For example, there is already existing legislation, regulation and best practice guidance governing disclosure requirements in relation to environmental, social and governance (ESG) matters. Including references to environmental and social matters in Provision 1 of the Code would be duplicative and create even greater uncertainty for companies in relation to disclosure of ESG matters.

  3. Proportionality is king

    The JWP emphasises the importance of the proposed changes being proportionate in what they require of companies: both as to the nature of the requirements as well as the potential costs of compliance. This is especially important given the wide scope of companies to which the Code applies, from large international businesses to small cap companies with limited resources. For example, companies responding to the consultation have indicated that the proposed changes to Section 4 of the Code (Audit, Risk and Internal Control) would require companies to dedicate considerably more time and money to the process of reporting and the related assurance activities. The JWP encourages the FRC to consider undertaking an impact assessment in relation to these changes.

  4. The risks of specifics

    The JWP expresses concern that some proposed amendments are increasingly specific and require greater detail from companies, potentially resulting in companies adopting formulaic boilerplate disclosure. For example, the FRC proposes that all significant director appointments are listed in the annual report, describing how each director has sufficient time to undertake their role effectively considering commitments to other organisations. The JWP notes that given how the amount of time required to meet each director's commitments will vary over the year, it is unlikely this requirement would result in meaningful disclosure and suggests it would be more helpful for directors to be required to consider time spent on other commitments.

  5. Guidance might be the answer

    The JWP suggests that some of the proposed changes can be best achieved through enhanced guidance, but any further guidance should continue to reflect the fact there is no 'one size fits all' approach and where possible guidance should be consolidated rather than proliferated.

  6. All companies, great and small

The JWP notes the increased focus of the Code on large UK companies and seeks further guidance, in either the Code or the Listing Rules (or both), to help smaller companies outside of the FTSE 350 and any non-UK companies listed in the UK to deal with certain provisions.

The CGI's response

Key points in the CGI's response include:  

  • Concerns - much like those expressed by the JWP - regarding the increased specificity and breadth of required topics for disclosure potentially contributing to a rise in boilerplate disclosures
  • Emphasis that materiality should be the sole remit of the board as only they are in the appropriate position to judge what reporting is material to the company (and what is not)
  • Suggestion that the Stewardship Code should be updated to recognise current investment market practice and to make it more enforceable

Over to the FRC?

There is no guidance yet as to whether the FRC will respond to the JWP's comments to the proposed amendments, but the FRC anticipates that the revised Code will apply to accounting periods commencing on or after 1 January 2025. The consultation closed on 13 September 2023.

Further information about the FRC and the consultation can be found on their website.



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