EDITORIAL: FRC CONSULTS ON REVISED UK CORPORATE GOVERNANCE CODE

In response to the white paper on restoring trust in audit and corporate, published last year, the FRC has issued a consultation paper, focussing largely on internal control, assurance and resilience with specific provisions including: 

• Setting out a revised framework of controls to provide a stronger basis for reporting on and evidencing their effectiveness.

• Improving the functioning of ‘comply or explain’, taking account of recently published FRC research and reports.

• Making necessary revisions to reflect the responsibilities of boards and audit committees for sustainability, ESG reporting, and associated assurance by a company's audit and assurance policy.

• Updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government's response to the white paper, including strengthening reporting on malus and clawback arrangements.

The focus of the proposed changes is based on outcomes and accountability rather than box-ticking. For example, the new Principle D states:

‘When reporting on its governance activity, the board should focus on outcomes to demonstrate the impact of governance practices and how the code has been applied. Where the board reports on departures from the Code’s provisions, it should provide a clear explanation.’ 

After the white paper was published, some commentators suggested that any revisions to the Code might move towards a more Sarbanes-Oxley regulatory environment, moving away from ‘comply or explain’. This appears not to have happened, but the changes seek to strengthen the effectiveness of ‘comply or explain’.

In his foreword to the Consultation, David Styles, director of corporate governance and stewardship at the FRC said:

‘The Code’s success relies on companies, investors and a wide range of stakeholders engaging to improve the quality of governance and stewardship, and to embrace the comply-or-explain nature of the Code. Boilerplate statements, playing back the words within the Code rather than applying the spirit of the Code, do not deliver the transparency that the market needs. Equally, investors and their advisors must consider explanations for departures from the Code thoughtfully, taking full account of company circumstances.’

The full consultation document can be found here.

The consultation closes on Wednesday 13th September and the FRC anticipates the new Code will apply to accounting periods commencing on or after 1st January 2025.