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The Financial Reporting Council’s (FRC) consultation paper on changes to the UK Corporate Governance Code (Code) closed on 13 September 2023. This consultation focuses on the reforms proposed by the Government in its consultation on Restoring Trust in Audit and Corporate Governance to support the FRC’s transition into the Audit, Reporting and Governance Authority (ARGA). The proposed changes to the Code include:
- Setting out a revised framework of prudent and effective 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 the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company’s audit and assurance policy.
- Ensuring that the Code reflects the new Minimum Standard for Audit Committees in relation to external audit.
- Updating the Code to ensure that it aligns, where possible, with the Government’s reforms.
Companies with a premium listing on the London Stock Exchange are required to report against the Code, although other companies choose to do so on a voluntary basis recognising the value of good governance.
Among the published responses to the consultation, a group of in-house general counsel (GC) and interested parties have responded to highlight the ‘extraordinary’ lack of a specific reference in the Code or its supporting guidance to the role of the GC, particularly given the alignment of the GC’s fundamental professional duties with the FRC’s corporate governance objectives and the Code. The group highlights a perceived risk to good governance when GCs do not have a direct reporting line to the board, and stress that the Code and its guidance should explicitly identify the key nature of an effective GC in supporting the board, audit committee and other functions in their roles ensuring strong governance over risk management. Furthermore, the group urges the FRC to direct organisations to establish and maintain governance around the GC’s role to enable its fulfilment, and recommend strong best practice guidance for companies that have a duty to appoint a company secretary to also have a GC or equivalent.
Separately, the Chartered Governance Institute of the UK & Ireland (CGI) has called in its response for balance in the Code, recognising ‘the importance of a strong governance environment in the overall UK economy, while acknowledging that any increasing reporting requirements are taking time away for strategic discussions at board level’ and increases the risk of ‘boiler-plate disclosures’ from companies. The CGI also calls for the pivotal role in corporate governance of company secretaries and governance professionals to be recognised, and calls for further guidance from the FRC on reporting on climate ambitions and transition plans to be included in the Code.
The Quoted Companies Alliance (QCA) has responded from the viewpoint of small and mid-sized quoted companies, considering many of the proposed changes to the Code to be potentially problematic in the context of the current climate and ‘the considerable and concerning decline in use of [UK] public markets’. The QCA attributes this decline to the disproportionately high burdens and costs faced by quoted companies limiting the board’s ability to focus on growth and development and outweighing the benefits of being on a public market.
In its response, the Institute of Directors (IoD) disagrees that the Code is deterring companies from listing in the UK, but believes the FRC could ‘better emphasise the flexibility inherent in the Code and the importance of avoiding a ‘tick box’ approach to assessing standards of governance’ and that the Code should avoid being too prescriptive whilst minimising reporting requirements where possible, allowing boards more freedom to act in the best interests of their companies.
The FRC intends for the revised Code to apply to accounting years commencing on or after 1 January 2025. Its summary of responses and next steps will be published in due course.
Michelmores’ Corporate Services team has a wealth of experience in statutory compliance and all aspects of corporate governance. Please do get in touch with any member of the team or email cosec@michelmores.com.
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