FRC publishes consultation on the UK Corporate Governance Code

Section 1 – Board leadership and company purpose

The FRC is proposing to introduce a new Principle which sets out the expectation that companies should, when reporting on their governance activity, focus on activities and outcomes to demonstrate the impact of governance practices. The FRC has previously highlighted that reporting has been lacking in this respect.

The FRC is also proposing amendments which are intended to bring more focus to environmental and social matters. This builds on the FRC's 2021 report Creating Positive Culture – Opportunities and Challenges and is intended to encourage companies to report on how effectively the desired culture has been embedded. 

Section 2 – Division of responsibilities

The FRC has stressed that those in leadership positions must be able to devote sufficient time to their responsibilities. Specifically, when a company is experiencing a challenging situation where more intensive consideration and action is required, there will be increasing demands on directors' time. Against this backdrop and in view of increased concern from investors about the number of board positions held, the FRC intends to strengthen the Code's disclosure requirements in this area. In this regard, the FRC has proposed that section 2 should be amended to require annual reports to include more information on directors' other commitments and how they manage these. The FRC has also proposed that section 3 should be amended to require the annual board performance review should consider each director's commitments to other organisations.

Section 3 – Composition, succession and evaluation

The FCA published a policy statement on diversity and inclusion earlier this year and corresponding updates to the Listing Rules now require companies to report on whether they have achieved targets for female and ethnic minority representation on their board. The FRC intends to support the FCA's policy to emphasise the importance of diversity and inclusion in the board's composition without introducing duplicative targets or regulations. This includes amendments to introduce a reference to inclusion and to give equal weight to all protected and non-protected characteristics, to encourage companies to consider beyond diversity and ethnicity.

Separately, the FRC has identified poor reporting on succession planning. Accordingly, Section 3 is also being amended to require enhanced disclosures on succession planning in relation to both board and senior management appointments.

Section 4 – Audit, risk and internal control

The main proposed changes to the Code are contained in this section, which fall into three broad themes.

1. The FRC has proposed that the obligation to produce an Audit and Assurance Policy ("APP") should apply to all companies reporting against the Code. For context, in response to the white paper the government has confirmed its intention to introduce a statutory requirement for Public Interest Entities ("PIEs") to produce an APP describing the directors' approach to seeking internal and external assurance of the information they report to shareholders. PIEs are defined in draft legislation as companies which have 750 or more employees and a turnover of £750 million or more. The FRC believes that the requirement to produce an APP should be extended to cover all Code companies as this is easier to comply with or monitor against.

    

2. Changes to Section 4 reflect the wider responsibilities of the board and audit committee for expanded sustainability and ESG reporting. The proposed amendments would give the audit committee a new responsibility for monitoring the integrity of narrative reporting, including sustainability reporting and describing its work in this area in the annual report.

    

3. The FRC is proposing to strengthen board accountability and reporting in relation to internal controls. In particular, the board would be responsible for not only establishing but also for maintaining the effectiveness of the risk management and internal control framework. As a result, the board would be responsible for reporting to shareholders on their work during the relevant reporting period.

Section 5 – Remuneration

The FRC is proposing amendments to Section 5 to strengthen links between a company's remuneration policy and overall corporate performance, including ESG objectives. In particular, the FRC is proposing to introduce a new Principle which sets out the overarching expectations of directors' remuneration policies, including an emphasis on transparency and a link to long-term sustainable success. Other proposed amendments to Section 5 would require greater transparency and disclosures relating to malus and clawback arrangements. Click here for more on the remuneration aspects of the consultation.

Next steps

The consultation closes on 13 September 2023 and the FRC has proposed that revisions to the Code should apply to accounting years commencing on or after 1 January 2025.

In the meantime, if you have any questions about the proposals set out in the consultation, please feel free to get in touch with a member of our team: SHCapitalMarkets@shlegal.com.