Following the government’s white paper on ‘Restoring trust in audit and corporate governance’, the FRC has published a consultation on the UK Corporate Governance Code (“Code”). The consultation focuses on changes to:
- reflect the responsibilities, diversity of skills and experience on boards and the expanded responsibilities of audit committees;
- improve the transparency of malus and clawback provisions for directors’ remuneration; and
- update the Code to ensure it aligns with the government’s draft legislation (not yet published).
Comments are requested by 13 September 2023. It is expected that the revised Code will apply to financial years beginning on or after 1 January 2025 to allow sufficient time for implementation.
Section 1 – Board leadership and company purpose
To introduce a new Principle confirming the expectation that companies should, when reporting on their governance activity, focus on activities and outcomes to demonstrate the impact of governance practices and how the Code has been applied.
Section 2 – Division of responsibilities
The FRC is cognisant of investor concerns that those in leadership positions can devote sufficient time to their responsibilities. In recognition of the increasing demands on directors’ time and as a way of supporting diversity of skills and experience on boards, the FRC is seeking views on two proposals:
- to specify that the annual board performance review should consider each director’s commitments to other organisations, and how directors are able to make sufficient time available to discharge their role effectively; and
- annual reports should include more information on directors’ other commitments and how they manage these. This should include setting out not only board positions but also committee roles and the potential number of commitments each year.
Section 3 – Composition, succession and evaluation
Changes to this section are designed to tie in with the new FCA targets (in the Listing Rules) on board diversity and to encourage diversity beyond gender and ethnicity i.e. to all protected and non-protected characteristics including cognitive and personal strengths. The FRC also proposes to issue guidance on how companies should report on board evaluations (to be renamed ‘board performance reviews’).
Section 4 – Audit, risk and internal control
The new proposals in the government’s white paper for PIEs* to produce a triennial Audit and Assurance Policy (AAP) and an annual Resilience Statement require changes to this section including how these issues are addressed for non-PIE Code companies. For example, the FRC is proposing that responsibility for developing/implementing the AAP is designated to the audit committee and that non-PIE companies should consider producing an AAP on a ‘comply or explain’ basis using the new legislation as a guide.
Changes to section 4 also include expanding the remit of audit committees to include monitoring the integrity of narrative reporting, including sustainability matters and where appropriate, ESG metrics.
*PIEs are companies with 750 or more employees and a turnover of £750 million or more.
Section 5 – Remuneration
There is a new requirement for director contracts and/or other agreements to include malus and clawback and for the annual remuneration report to include a description of these provisions including the circumstances in which they could be used and if they have been used in the last reporting period. The aim of these changes is to provide greater transparency for investors.