The Financial Reporting Council (FRC) has published a consultation paper on changes to the UK Corporate Governance Code.

The majority of the proposed changes implement reforms outlined by the government in May 2022 following its consultation on audit and governance reform.

The changes proposed include:

  • Internal controls – Rather than adopting a statutory reporting and assurance regime (similar to the US Sarbanes-Oxley regime), the proposed changes will require the board to include in the annual report:
    • a declaration on whether the board can reasonably conclude that the company’s risk management and internal control systems are effective;
    • an explanation of the basis for that declaration; and
    • a description of any material weaknesses identified when reviewing the effectiveness of those systems.
  • Enhanced audit committee role – Audit committees will be given responsibility for the oversight of narrative as well as financial reporting – this includes environmental and sustainability reporting, an area of increased focus for the Governance Code. The role of audit committees in the oversight of the external audit process and relations with external auditors will be expanded. Related to this, the FRC has also published this week a Minimum Standard for Audit Committees of FTSE 350 companies in relation to external audit. Under the proposed changes to the Governance Code, the Minimum Standard would apply to all Governance Code companies (though on a “comply or explain” basis only for non FTSE-350 companies). For further information on the Standard, see our blog post here.
  • Environmental, social and governance considerations – In addition to giving the audit committee oversight of ESG reporting, the proposed changes would increase the focus on ESG matters (including climate matters and transition planning) and how they are taken into account when considering a company’s strategy. The FRC says that it considered, but decided not to introduce, a requirement for companies to have a board sustainability committee.
  • Directors’ time commitments – The current provisions in relation to directors’ time commitments would be enhanced, with greater disclosure required in relation to directors’ other commitments and more focus on time commitments as part of the board performance review.
  • Comply or explain reporting – The FRC is proposing to introduce a new principle that seeks to improve “comply or explain” reporting as well as reporting on the impact and outcomes of governance practices.

Alongside the consultation on changes to the Governance Code, the FRC will review the supporting guidance in the Guidance on Audit Committees, the Guidance on Board Effectiveness and the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. The FRC has highlighted some of the changes it intends to make to this guidance and invites comments on these changes as part of this consultation process.

The consultation closes on 13 September 2023. The FRC’s intention is that the new Governance Code will apply to financial years beginning on or after 1 January 2025.