RoadMap
New Corporate Governance Code to increase transparency
Changes to the Corporate Governance Code by the Financial Reporting Council will commence from January 2025, amid claims the proposals have been watered down
The FRC sets out with a robust agenda
The plans put forward by the Financial Reporting Council (FRC) in May 2022 included toughened environmental, social and governance (ESG), diversity and inclusion, audit committee and compliance requirements. “We believe that the adoption of this standard will contribute to a stronger and more robust audit market,” Mark Babington, executive director of regulatory standards at the FRC, said at the time.
The move was also part of a major effort by the FRC to increase ethnic board diversity at FTSE 350 companies, following the Parker Review of ethnic diversity of UK boards in 2017.
Goalposts shift due to government policy
In January, those plans were pared back significantly as a result of a shift in government policy.
The FRC instead announced the code would focus more narrowly on risk management and internal control reviews. Areas including audit, risk and control; board leadership; composition, success and evaluation; and remuneration will be subject to tighter regulation and monitoring, with a ‘comply or explain’ principle applied to affected businesses.
Richard Moriarty, CEO of the FRC, said the decision was taken to balance “supporting UK economic growth and competitiveness”, adding that the ESG provisions had been removed because the regulatory landscape for sustainability and environmental matters was moving too quickly to pin down in the code.
Former Conservative city minister Andrew Griffith previously said: “The UK rightly enjoys a strong reputation for high standards, but it’s important we don’t burden our best and brightest companies.”
Revised code is slated for January 2025
The 2024 code will apply to financial years commencing on or after 1 January 2025. As with previous iterations, it will be operated on a ‘comply or explain’ principle. The FRC has made clear that compliance can mean either complying with the code’s provisions or providing a “cogent and justified” explanation for why a provision is not suitable in the specific circumstances for the company.
The FRC added that “a good explanation illustrates better governance more than a situation where a board defaults to compliance with a specific code provision that manifestly doesn’t suit its circumstances but where the board lacks the confidence to make the explanation”.
Risk management declaration will follow in 2026
The requirement for a board declaration on the effectiveness of risk management and internal controls kicks in on 1 January 2026. The extended period provides boards with additional time to strengthen their internal control processes and implement the new arrangements.
