Following the publication of its feedback statement in April 2016, the Financial Reporting Council (FRC) has now published final versions of a number of documents, including the UK Corporate Governance Code (the Code), its Guidance on Audit Committees, and its Revised Ethical Standard. No substantive changes have been made to the April 2016 drafts of the Code or the Guidance on Audit Committees.
- UK Corporate Governance Code - final
- Guidance on Audit Committees - final
- Revised Ethical Standard - final
- Feedback Statement
Amendments to the Code
- The appendix on page 27 of the Feedback Statement above is useful as it shows all the changes to the Code (tracked) which applies to accounting periods beginning on or after 17 June 2016.
The FRC has taken out the comply or explain reference to undertaking an audit tender at least every ten years as this Code provision has been superseded by requirements in the Audit Regulation and Directive and the Competition and Markets Authority's Order.
- On audit committee composition the FRC decided not to bring the wording in line with that of the Audit Directive (ie that “at least one member of the audit committee shall have competence in accounting and/or auditing”). So the wording in the Code remains unchanged, ie that “the board should satisfy itself that at least one member of the audit committee has recent and relevant financial experience”. In its feedback the FRC states:
"Most of those respondents who replied on this point preferred the current formulation, “recent and relevant financial experience”, as it was considered broader and more flexible. It has been in the Code for a number of years and was felt to be well understood. In light of the feedback, we are proposing to continue with it."
- This is what the FRC has said about its Code amendment concerning disclosing advance notice of any plans to retender:
"A number of the responses on this issue were supportive of including an indication of when companies next intend to retender. Some comments referred to the CMA Order which for the FTSE 350 requires disclosure only from five years after the most recent audit tender. The FRC believes that the practice of providing advance notice by all Code companies is of greater value. However, the addition of the word "any" has been made as we wish to ensure that reporting is only undertaken when focused and relevant, to give shareholders and other interested stakeholders details of when the board or audit committee considers it appropriate to retender. An institutional investor response noted that giving sufficient advance notice will provide them with an opportunity, should they wish to do so, to engage with the company on its upcoming tender process. The Guidance has been amended to reflect this revised wording."
- This is what the FRC has said about its Code amendment concerning the audit committee as a whole having competence relevant to the sector in which the company operates:
"One company respondent did not support the proposed changes, as they considered that a requirement for sectoral competence may unnecessarily narrow the range of suitable candidates. Another respondent felt that more guidance on the interpretation of “as a whole” and “relevant to the sector” is required. We have decided to proceed with the proposal regarding competence relevant to the sector. Given the amendments to the Guidance to provide that a range of skills, experience, professional qualifications and knowledge are important in meeting the requirements of the Code, we do not consider the formulation overly narrow when the Code and Guidance are read together. We consider that sectoral competence is broader than sectoral executive experience.
We have also included in Section 4 of the Guidance a recommendation that the company disclose “how the audit committee composition requirements have been addressed” in the audit committee section of the annual report, if not provided elsewhere."
FRC Plans for 2016/17
The FRC has published its plans for 2016/17 as at April 2016.
In this document, the FRC states:
- Corporate culture:
"During 2016/17, we will publish a report of our observations, identify good practice and develop practical and market-led ‘how to’ resources. Our aim is to help boards, across a broad range of sectors and industries, take effective action on culture."
"Following on from that we will also replace the FRC’s Guidance on Board Effectiveness with new material that has culture at its heart, to support the application of the principles in the UK Corporate Governance Code"
- Board succession planning:
"We have published a discussion paper – ‘UK Board Succession Planning’ seeking views on board succession for both executives and non-executives in order to support a suitably talented, diverse pipeline of directors ready to serve on the boards of UK listed companies. We will publish feedback early in 2016/17."
This has now been published and is available here.