UK Corporate Governance Code - Looking To The Future

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Lucy McClements

In Q2 2023, the Financial Reporting Council (FRC) conducted a significant consultation on the UK Corporate Governance Code, aiming to enhance transparency, accountability, and governance practices. This consultation followed a request by the Government to consider some specific areas and enhancements around adapting corporate governance frameworks to evolving economic and societal demands. This was no surprise following damage to investor and public trust from the collapse of several high-profile businesses including Carillion, BHS and Thomas Cook.

Importantly, this consultation mattered to more than just listed companies. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) expect dual regulated firms and the larger solo-regulated firms to be able to explain where and why they are unable to comply with the principles set out in the Code. It was clear that the regulators looked at the contents of the Code to inform their supervisory assessment of a firm’s governance and accountability framework.

In summary, the FRC's focus areas in the 2023 consultation were:

• Board leadership and company purpose – a new principle that the company should report on activities and outcomes when reporting on governance to demonstrate the impact of governance practices.

• Division of responsibilities – increased scrutiny on the number of board positions held by company directors and how the director has sufficient time to discharge their role effectively (so called ‘over-boarding’).

• Composition, succession, and evaluation – requirements to describe the work of the nomination committee in promoting equality, diversity, and inclusion.

• Audit, risk, and internal control – enhancing the responsibilities of the Audit Committee across a broader remit encompassing narrative reporting, ESG, as well as a new minimum standard.

• Remuneration – revisions aimed at strengthening the links between remuneration policies and corporate performance in the wider sense, including ESG objectives.

Perhaps unsurprisingly, the response from stakeholders varied, with some advocating for a more robust approach to certain proposed changes, while others appreciated the FRC's efforts to modernize governance standards. The PRA and FCA also contributed with publication of their Policy Statements on Equality, Diversity & Inclusion over the summer, which proved to be less bold than the ideas set out in the original joint Discussion Paper.

Perhaps, what many were not expecting was the Government’s decision not to include primary legislation to modernise the regulation of audit, corporate reporting, and governance in the King’s speech in November. As a result, the FRC has stated its intention to take forward fewer than half of the original 18 proposals set out in the consultation, specifically:

• The main substantive change concerns revisions (informed by stakeholder feedback) to the original proposal on internal controls which will allow more time for its implementation and ensures the UK approach clearly differentiates from the much more intrusive approach adopted in the US.

• A small number of changes that streamline and reduce duplication associated with the Code that were overwhelmingly supported by stakeholders in the interests of reducing burdens.

The original proposals not being taken forward relate to the role of audit committees on environmental and social governance and modifications to existing code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders.

Given the wider debate around business reporting requirements and burdens across the economy it seems reasonable to press ‘pause’ on some of the original proposals. There were genuine concerns that toughening up the UK Corporate Governance Code would add further fuel to the argument that the City could lose even more competitiveness as it vies New York for listings. Nevertheless, the decision not to impose more explicit requirements on the UK’s largest and most important businesses in relation to improving Equality, Diversity & Inclusion (ED&I) does create a somewhat unlevel playing field. Let us not forget that smaller less well-resourced organisations, such as charities and sport’s governing bodies, are already expected to comply or explain against a broader set of ED&I related principles compared to their larger peers. It seems a little harsh not to expect larger businesses to be doing more to promote diversity amongst their ranks, although many may continue to make strides in this area now the future direction of travel is clear.

The FRC's 2023 consultation could have marked a pivotal moment in the evolution of governance practices for the largest businesses, but for now it looks likely to be a missed opportunity. Maybe corporate governance was never going to be a vote winner in the run up to the general election! In the meantime, an updated version of the Code is expected to be published this month (January 2024) to apply to accounting periods commencing on or after 1 January 2025.