Following a 16-week stakeholder consultation, the Financial Reporting Council (FRC) finalised its updates to the UK Corporate Governance Code (the 2024 Code) on 22 January 2024. This replaces the current 2018 Code and applies to financial periods beginning in 2025.
The FRC has kept revisions to the Code to a minimum, whilst seeking to enhance transparency and accountability of public companies. It also upholds the flexibility of the existing ‘comply or explain’ regime.
Principal changes to the UK Corporate Governance Code
Maintained by the FRC, the UK Corporate Governance Code (the Code) sets out the expected standards of good practice (the ‘Principles’) that boards of directors should follow to promote the purpose, values, and long-term success of the companies they manage.
It underpins the effective system of rules, processes, and practices that exist to manage and control companies operating in the UK.
Rather than being law, it operates on a ‘comply or explain’ basis and is separated into five sections:
- Board Leadership and Company Purpose
- Division of Responsibilities
- Composition, Succession, and Evaluation
- Audit, Risk, and Internal Control
- Remuneration
To promote smarter regulation, the new 2024 Code includes only a limited number of targeted, proportionate, and balanced changes from the current 2018 Code. In response to stakeholder feedback, the FRC has chosen to prioritise revisions to Internal Controls, with other minor changes aimed at streamlining expectations and clarifying language in the Code.
Commenting on the revisions, the FRC’s CEO Richard Moriarty said:
“A global reputation for high standards of corporate governance is a competitive advantage for UK plc and our revised Code helps this by enhancing transparency on internal controls, but in a way that is proportionate and minimises reporting burdens on businesses.”
Below is an overview of the main changes introduced in the 2024 Code:
Section 1 – Board leadership and company purpose
The FRC has reframed Principle C, which now requires companies to focus their governance reporting on board decisions, and their outcomes within the context of the company’s strategy and objectives.
Revisions to Provision 2 expand the role of the board to not only assess and monitor their company culture but also the way that the desired culture has been embedded within the organisation.
Section 3 – Composition, succession, and evaluation
Through amendments to Principle J, the UK Corporate Governance Code 2024 promotes diversity, inclusion, and equal opportunity without reference to specific groups. To indicate that diversity policies can be wide-ranging, the updated Code has removed the list of diversity characteristics.
Changes to Provision 23 reflect the fact that some companies may have additional initiatives in place alongside their diversity and inclusion policy.
References to ‘board evaluation’ within the Code have now been changed to ‘board performance review’.
Section 4 – Audit, risk, and internal control
Following amendments to Principle O, the board of directors is now responsible for maintaining the effectiveness of the company’s risk management and internal control framework, rather than simply establishing it.
Provisions 25 and 26 have been updated to reflect the FRC’s Minimum Standard on Audit Committees and the External Audit. Duplicate language has also been removed.
Provision 29 has been expanded to include new reporting obligations. The board is required to monitor the company’s risk management and internal control framework, reviewing its effectiveness at least annually.
The monitoring and review of the framework should cover all material controls, including operational, financial, reporting, and compliance. In its annual report, the board of directors should provide:
- A description of how it has monitored and reviewed the effectiveness of the company’s risk management and internal control framework
- A declaration of effectiveness of the material controls as of the balance sheet date
- A description of any material controls that have not operated effectively as of the balance sheet date, including any action taken or proposed to improve the controls and previously reported issues
Since the needs of different companies may vary widely, it is for the board to determine what comprises its material internal controls.
Section 5 – Remuneration
Amendments to Provision 37 specify that directors’ contracts and/or other agreements or documents covering director remuneration should include malus and clawback provisions.
Provision 38 requires companies to include a description of their malus and clawback provisions in their annual report, including:
- The circumstances under which they could use malus and clawback provisions
- A description of the period for malus and clawback, and why the selected period best suits the company
- Whether the provisions were used in the company’s last reporting period and, if so, a clear explanation of the reason for doing so
Provision 40 of the 2018 Code, along with the related elements of Provision 41, have been removed from the 2024 Code. These relate to factors for consideration when setting executive remuneration.
When do these changes come into effect?
The UK Corporate Governance Code 2024 applies to financial years beginning on or after 1 January 2025, with the first reporting in 2026.
Provision 29, however, applies to financial years beginning on or after 1 January 2026. This extended period ensures that boards have sufficient time to strengthen their approaches to internal control frameworks and implement the new arrangements.
The FRC published full guidance on the new UK Corporate Governance Code 2024 on 29 January. This provides advice, further detail, and examples to support those companies and advisors who use the Code.
Additionally, the FRC has released a UK Corporate Governance Code 2024 myth buster.
Who does the UK Corporate Governance Code apply to?
The UK Corporate Governance Code applies to all companies with a premium listing on the London Stock Exchange (i.e. public limited companies) from the moment they become premium listed, irrespective of their country of incorporation.
Whilst the Code does not apply to private companies, many still choose to follow it to ensure they have appropriate policies, systems, and practices in place. Doing so is shown to improve the growth potential and long-term value of a company, reduce risk, and strengthen brand reputation.
Companies of all types and sizes, including the smallest of startups, can adapt the Code’s main principles and practices to their specific needs. Aside from benefitting internal operations and efficiencies, taking this approach demonstrates to stakeholders – from employees and suppliers to investors and society – that the business is well governed, trustworthy, and has a prudent attitude to risk.
What is the ‘Comply or Explain’ regime?
Recognising that a single approach to effective corporate governance does not suit all companies, the UK Corporate Governance Code operates on a ‘comply or explain’ basis.
This flexible approach considers that, in particular circumstances, it may be beneficial or necessary for a company to implement more suitable bespoke governance arrangements, either in the short term or long term, rather than complying with a provision in the Code.
Where a company does depart from the Code, it should explain in its annual reports how the alternative arrangement it has chosen is more appropriate and beneficial for upholding the required high standards of corporate governance.
Concerning the ‘comply or explain’ principle, Mr Moriarty commented:
“It is important that the flexibility of the ‘comply or explain’ principle is properly utilised. The FRC is clear that compliance can mean either complying with the Code provisions as set out, or providing a cogent and justified explanation for why a provision is not suitable in the specific circumstances for the company, whilst demonstrating the principles of good governance. Frankly, a good explanation illustrates better governance more than a situation where a Board defaults to compliance with a specific Code provision that manifestly doesn’t suit its circumstances, but where the Board lacks the confidence to make the explanation”.
The FRC provides detailed guidance on Comply or Explain reporting, describing how companies can provide good quality explanations when departing from the Provisions set out in the Code.
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