March 2024
FRC revises UK corporate governance code in the hope ofcreating smarter regulation.
The Financial Reporting Council (FRC)has announced what it says areimportant revisions to the UK CorporateGovernance Code (the Code), that will “enhancetransparency and accountability of UK plc andhelp support the growth and competitivenessof the UK and its attractiveness as a place to invest”.
In a move aimed at promoting smarter regulation, the FRC has kept changes to the Code to “the minimum that are necessary”. The FRC emphasised it is conscious that the expectations for effective governance must be targeted and proportionate.
The FRC has prioritised revisions to the Code in one significant area – internal controls. As signalled on 7 November, it has dropped its earlier proposals for revisions to the Code related to the role of audit committees on environmental, social and governance issues; expanding diversity and inclusion expectations; over-boarding provisions; and expectations on Committee Chairs’ engagement with shareholders.
The existing expectations on internal controls in the Code remain. Namely that the Board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness. The existing Code also includes the provision that monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. The main substantive change the FRC is now making is asking Boards to explain through a declaration in their Annual Reports how they have done this and their conclusions.
FRC stressed it is for a Board to determine what should comprise its material internal controls. It is mindful that the needs of each business may vary and that the level of maturity of non-financial controls for some businesses may not be, or need to be, as mature as for their financial controls. FRC said: “It is for the Board to determine what level of maturity is right for its business and their own levels of required assurance in relation to the effectiveness of these controls.”
The new Code expectation for the Board declaration will come into effect from 1 January 2026, one year after the rest of the updated Code comes into effect, from 1 January 2025. Commenting on the new Code, FRC CEO Richard Moriarty (pictured) said: “A global reputation for high standards of corporate governance is a competitive advantage for UK plc and our revised Code helps this by enhancing transparency on internal controls, but in a way that is proportionate and minimises reporting burdens on businesses.
“The small, but important, change to the expectations on internal controls will better support Boards asking the right questions at the right time to help them gain the level of the assurance they require and to be able to demonstrate good governance to investors to and other stakeholders.”
