- The Financial Reporting Council (FRC) has published the 2024 edition of the UK Corporate Governance Code (Code). The Code applies to companies with a premium listing on the UK’s Official List, on a “comply or explain” basis.
- The new Code follows a consultation launched in May 2023 in which the FRC proposed to make significant changes to the Code. Many of the proposals were driven by the UK government’s own plans for major reforms to the UK’s audit and corporate governance regimes.
- However, following the government’s announcement that it was withdrawing its proposed legislation, the FRC announced in November 2023 that it intended to reduce significantly the scope of its changes to the Code. The 2024 Code reflects that decision.
- Key reforms that have survived the consultation process include new reporting obligations in relation to a company’s material controls (including a board declaration on their effectiveness). More disclosure is also expected on malus and clawback arrangements, with the Code now specifying these provisions should be built into contracts and other directors’ remuneration documents.
- The FRC has also published new Corporate Governance Code Guidance to the 2024 Code, which consolidates and updates its previous guidance on different aspects of the Code in one place.
- The 2024 Code will apply to financial years beginning on or after 1 January 2025, with the exception of the changes to risk management and internal control monitoring and reporting, which will apply to financial years beginning on or after 1 January 2026.
Key changes to the Code
The main changes to the Code (in comparison to the current, 2018 version) include the following.
Board leadership and company purpose
- A new Principle C requires governance reporting to focus on board decisions and their outcomes in the context of the company’s strategy and objectives, with the board required to provide a clear explanation when it reports on any departures from the Code’s Provisions. This reflects the FRC’s renewed emphasis on the “comply or explain” approach to Provisions in the Code, and on meaningful reporting on outcomes. There is a corresponding expectation in the Introduction to the new Code that investors and proxy advisers will consider explanations for departures from the Code thoughtfully, taking full account of a company’s circumstances.
- The board’s assessment and monitoring of culture should also extend to how the desired culture has been embedded in the group (Provision 2).
Composition, succession and evaluation
- While Principle J requires board appointments and succession plans for the board and senior management to promote diversity, inclusion and equal opportunity, the FRC has removed the list of diversity characteristics, to indicate that diversity policies can be wide ranging. In the annual report’s description of the nomination committee’s work, disclosures on the diversity and inclusion policy should also include any initiatives in this area (Provision 23).
- The chair should commission (rather than “consider having”) a regular externally facilitated board performance review (Provision 21). The change from “evaluation” to “performance review” is intended to indicate the need for a continual process of self-improvement for boards, rather than a backwards-looking assurance process.