FRC Enhances UK Corporate Governance Code to Boost Transparency and Accountability

The Financial Reporting Council (FRC) has unveiled crucial revisions to the UK Corporate Governance Code, designed to elevate transparency, bolster accountability, and strengthen the competitiveness of the UK as an investment destination. The changes, outlined in the FRC's Policy Statement of November 7, respond to extensive stakeholder consultation, marking the largest ever conducted by the FRC in 2023.

In a strategic move towards smarter regulation, the FRC has kept changes to the Code at a minimum, emphasizing targeted and proportionate adjustments. The focus on effective governance, while minimizing the burden on businesses, aligns with the FRC's commitment to maintaining trust and confidence in UK entities.

Key among the revisions is the prioritization of Internal Controls, reflecting stakeholder support for robust corporate governance. The FRC has opted not to proceed with earlier proposals related to audit committees' role in environmental, social, and governance issues, diversity and inclusion expectations, over-boarding provisions, and Committee Chairs' engagement with shareholders.

In terms of Internal Controls, the existing expectations in the Code remain, with the FRC introducing a substantive change. Boards are now required to explain through a declaration in their Annual Reports how they have monitored the company's risk management and internal control framework, along with a review of its effectiveness. The flexibility for each business to determine its material internal controls is emphasized, recognizing variations in needs and maturity levels.

In response to stakeholder feedback, the Board declaration expectation will be effective from January 1, 2026, providing ample time for Boards to develop their approaches to Internal Controls. The FRC's principles-based approach, centered on Boards making judgments on materiality, aims to strike a balanced response to meeting enhanced investor expectations while minimizing reporting burdens on businesses.

Minor changes have been introduced to streamline expectations and clarify language, particularly in malus and clawback provisions and audit committee minimum standards. The foundational "Comply or Explain" principle remains intact, encouraging active support from Boards, investors, and advisors to tailor governance expectations to each company's unique circumstances.

Richard Moriarty, CEO of the FRC, emphasized the importance of the revised Code in maintaining the global reputation of high corporate governance standards as a competitive advantage for UK entities. He highlighted the significance of the Internal Controls change, stating that it better supports Boards in ensuring good governance and transparency.

The FRC plans to release digitally accessible guidance associated with the Code on January 29, offering valuable context to Boards considering compliance with the Code. The guidance, while not a Code requirement, aims to contribute insights drawn from the FRC's Stakeholder Insight Group, representing various perspectives keenly interested in the Code, such as preparers and investors.

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