On 7 November 2023 the FRC issued a press release in relation to its ongoing review and update of the UK Corporate Governance Code (the ”Code”), announcing a big scaling back of revisions it had proposed to the Code. That review was launched in May and we produced a briefing about here. Publication of an updated Code is now promised for January 2024.
Why are updates to the Code being scaled back?
A key driver for the FRC’s review was the request that it had received from the Government to introduce into the Code a number of non-statutory corporate governance reforms coming from the Government’s Restoring Trust in Audit and Corporate Governance initiative. Last month, however, the Government withdrew the draft secondary legislation it had introduced under that initiative to implement a series of new corporate reporting requirements for “large” listed and unlisted UK companies. We discussed those new requirements here.
Some of the changes proposed by the FRC to the Code reflected or, in relation to “smaller” Code-reporting companies not caught by the new statutory reporting requirements, were influenced by, these new reporting requirements. Additionally, in the King’s Speech a few days ago there was no mention of any new legislation to implement the other major “Restoring Trust” reforms, including the setting up of a new more powerful regulator (ARGA) to replace the FRC.
When it withdrew the draft secondary legislation mentioned above, the Government indicated that this was because of feedback it had received from businesses, concerned about the introduction of yet more corporate reporting obligations. The Government promised instead to focus on reducing and re-prioritising existing reporting requirements. In a similar vein, the FRC says it has carefully considered a full range of feedback - likely not all wholly supportive - on its proposed Code revisions and is conscious of current concerns about the burden of existing reporting requirements.
As a consequence, the FRC has decided that it should take forward a much reduced number of the changes initially proposed to the Code.
What is being dropped and what is being retained?
The enhanced risk management and internal controls reporting proposed in the Code review, will be retained. See our briefing on the Code review linked to above. In addition, a small number of minor changes to reduce duplication, etc., in the Code will be taken forward.
No specific mention is made of the proposed increased disclosures about malus, clawback and remuneration that the Government asked it to address in the revised Code but, subject to the feedback that the FRC has received on this, there seems no reason why those changes should not still be made.
Over half of the other changes will not be taken forward - including, additional responsibilities for audit committees, diversity disclosures, over-boarding and committee chairs’ engagement with shareholders etc. and, of course, those based on the proposed statutory corporate reporting than has now been withdrawn.
New approach to FRC Code guidance
The FRC also notes that several stakeholders have expressed concern about the impact of its various guidance on businesses, investors and advisers, with the implication being that it is framed or treated in too much of a prescriptive way with the result that compliance with the Code becomes more onerous than it needs to be. The FRC intends to ask its Stakeholder Insight Group to offer advice on whether existing and proposed new Code guidance could be improved to strike the right balance between supporting effective governance and reducing unnecessary burdens.
Stewardship Code - review in 2024 - fit for purpose?
Finally, the FRC notes that it is due to review the Stewardship Code. This Code (the current version applying since 2020) sets stewardship standards for asset owners and asset managers, and for service providers that support them and contains a series of ‘apply and explain’ principles for owners and managers, with a separate set of principles for service providers. The FRC says it has heard of some concerns about certain aspects of the Stewardship Code and will be engaging with stakeholders as a priority to consider what changes to that Code may be required going forward to ensure that it remains fit for purpose. It was notable that in September 2021 it was reported in the FT that several big name asset managers had failed to be admitted as signatories to the revised Stewardship Code, with a third of those applying to be signatories failing to pass the FRC's review process.