On 22 January 2024, the Financial Reporting Council (FRC) unveiled a number of sweeping reforms to the UK Corporate Governance Code (the CGC). Alongside reiterating the existing flexible "comply or explain" approach to reporting, the new CGC aims to enhance the transparency and accountability of companies in response to a series of high-profile UK corporate failures.
Applicable to all premium-listed companies (whether incorporated in the UK or elsewhere), the CGC reforms entail key changes to the responsibilities of auditors, actuaries and providers of assurance services; preparers of financial and non-financial information; directors; and other corporate control and reporting functions.
Auditors, actuaries and directors need to comply with new audit, risk and internal control responsibilities for financial years commencing on or after 1 January 2025 (with the exception of Provision 29, which is applicable for financial years beginning on or after 1 January 2026).
For financial years beginning on or after 1 January 2019 and before 1 January 2025, the 2018 version of the CGC will continue to apply.
What are the key changes?
The CGC consists of 18 Principles of good governance and 41 Provisions, separated into five sections. We summarise below what we consider to be the key changes.
Section 1 – Board leadership and company purpose
1. Principle C
The introduction of a new Principle C encourages companies to focus reporting on board decisions and their outcomes in the wider context of a company's overall strategy. Principle C aims to discourage boilerplate reporting which offers limited insight and, in line with the CGC's existing "comply or explain" approach, clear explanations should be provided for departures from the new CGC.
2. Provision 2
Provision 2 has been revised such that companies are required to not only assess and monitor culture but also to evaluate how the desired company culture has been implemented and embedded within the organisation.
Section 3 – Composition, succession and evaluation
3. Principle J
Principle J has been broadened to promote diversity, inclusion and equal opportunity. Specific groups are no longer referenced – the list of diversity characteristics has been removed. Originally, the FRC had considered expanding the list to include references to both protected and non-protected characteristics. However, in response to feedback that such amendments would risk inadvertently discriminating against certain groups, the revised Principle J opts for a more generalist approach and signals that diversity policies can encompass a wide range of considerations.
Section 4 – Audit, risk and internal control
4. Principle O
Principle O has been revised to mandate boards not only to establish but also to maintain effective risk management and internal control frameworks. Additionally, several provisions related to Audit Committees have been removed from the new CGC to prevent duplication, instead being covered under the Audit Committees and the External Audit: Minimum Standard.
5. Provision 29
The amended Provision 29 introduces new requirements related to the assessment and disclosure of companies' risk management and internal control frameworks. Exceptionally, Provision 29 will apply to financial years beginning on or after 1 January 2026, whereafter companies will be required to conduct, at least annually, a review of the effectiveness of all material controls, encompassing financial, operational, reporting and compliance controls (Relevant Material Controls).
Provision 29 has also been expanded to require companies to disclose in their annual reports how the board has monitored and reviewed such controls – companies will now be required in their annual reports to:
(i) describe how the board has monitored and reviewed the effectiveness of the risk management and internal controls framework;
(ii) make a declaration on the effectiveness of their Relevant Material Controls as at the balance sheet date; and
(iii) describe any Relevant Material Controls that have not operated effectively as at the balance sheet date, the action taken (or proposed) to improve such controls and actions taken to address previously reported issues.
Section 5 – Remuneration
6. Provision 37
Provision 37 has been amended such that directors' contracts and/or other agreements or documents covering the remuneration of directors should now also include malus and clawback provisions and specify the circumstances in which these provisions may be exercised. This amendment aims to enhance accountability in director remuneration practices by providing mechanisms for the recovery of compensation under specific conditions, contributing to a more robust and adaptable governance framework.
7. Provision 37
A new Provision 38 has been introduced to require companies to include specific details about malus and clawback provisions in their directors' contracts in their annual reports. Companies must disclose:
(i) when such provisions can be exercised;
(ii) the period for such provisions and why such period is appropriate in the context of the organisation; and
(iii) whether such provisions were used in the last reporting period and, if so, a clear explanation of the reasons for such use.
For further details on the changes to and guidance on the CGC, please see the FRC's summary of key changes, the FRC's 2024 CGC "mythbuster", and the FRC’s CGC guidance.
Client Alert 2024-047
