What Has Changed in the New Corporate Governance Code?: Five Key Things to Know about the New Code and Associated Guidance

On 22 January 2024, the Financial Reporting Council (the FRC) published revisions to the UK Corporate Governance Code (the 2024 UKCGC), replacing the 2018 version with effect from financial years commencing on or after 1 January 2025.¹

The UK Corporate Governance Code represents the gold standard of corporate governance in the UK and currently must be complied with by premium listed companies on the Main Market (regardless of country of incorporation) on a ‘comply or explain’ basis, meaning companies have the option to deviate from the Code as long as they provide a clear justification for doing so. As part of the ongoing reforms of the UK listing regime and plans to merge the premium and standard segments of the Main Market, it is envisaged that companies which are currently standard listed will need to apply the Code on a 'comply or explain' basis once the segments are merged. The new 2024 UKCGC will continue to operate on a ‘comply or explain’ basis.

The final changes made to the Code fall quite short of the FRC’s more ambitious initial proposals – the focus of the changes that were implemented being predominantly on internal controls. We summarise the five key areas of change below:

1.) More Responsibility Placed on Boards for Risk Management and Internal Controls Frameworks

Principle O was revised to clarify that the board's responsibility extends not only to establishing but also to maintaining the effectiveness of a company’s risk management and internal controls framework, putting additional responsibility on boards for managing risk.

Critically, Provision 29 now requires boards to report on the effectiveness of a company’s material internal controls in its annual report. An internal controls framework includes policies, processes and systems that (i) assist a company in achieving its strategic objectives, (ii) identify, monitor and mitigate risks, (iii) ensure the effective flow of information within an organisation, particularly the escalation of appropriate information up to the board so that it may be factored into strategic decision-making and (iv) ensure compliance with laws, regulation and conduct of business requirements.

With effect from 1 January 2026 (to allow boards time to develop their approach to internal controls), boards should provide in the annual report:

(a) a description of how the board has monitored and reviewed (on an at least annual basis) the effectiveness of the internal controls framework;

(b) a declaration as to the effectiveness of the company’s material internal controls as at the balance sheet date. This new obligation covers financial, operational, reporting and compliance controls. It will be interesting to see what external assurance and comfort boards seek from their accountants and other advisers in order to make this effectiveness declaration; and

(c) a description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed to be taken, to improve them and any action taken to address previously reported issues. Internal collection, escalation and monitoring procedures will therefore become increasingly critical in this regard.

These changes demonstrate the growing focus placed on risk management and internal controls as key pillars to good corporate governance, together with the important role boards are expected to play in monitoring and maintaining an appropriate internal controls framework within their organisations.

2.) More Effective Reporting of Board Decisions

Principle C was reframed to urge companies to report board decisions more clearly in the context of their strategy and objectives and to emphasise that detailed, context-specific explanations should be provided where the board reports on deviations from the Code's provisions. This underpins the FRC’s continued emphasis on more effective reporting.

3.) Culture and Diversity, Inclusion & Equal Opportunity

Provision 2 was strengthened to make clear that the board should not only assess and monitor company culture, which is seen as an important component of a company’s internal controls framework, but also how the desired culture has been embedded in the company.

Whilst Principle J still promotes diversity, inclusion and equal opportunity particularly as important constituents of an organisation’s internal culture, references to specific groups were not retained as was initially proposed by the FRC, in an attempt to recognise that these policies can be broad. Provision 23 now also acknowledges that companies may have additional initiatives with their diversity and inclusion policy.

4.) Directors’ Remuneration

Provision 37 now requires malus and clawback provisions to be included in legally binding directors’ contracts or other agreements relating to director remuneration (rather than in remuneration policies). These provisions allow companies to impose financial penalties on directors or withhold sums or share awards in specific circumstances (such as gross misconduct). This is a topic of particular importance to shareholders especially in light of certain public corporate governance failures in recent years. In practice, these changes may lead to companies reassessing existing contractual arrangements with directors to include these provisions.

A new Provision 38 was also inserted that mandates that companies include in their annual report a description of such provisions including when they apply and their duration, and indicate whether used in the prior reporting period, with a clear explanation if applied.

5.) New Guidance

On 29 January 2024, the FRC published associated non-mandatory guidance (the Guidance) to provide advice, further detail and examples to support companies and their advisers in applying the 2024 UKCGC. Helpfully, the Guidance contains a series of prompts and questions that boards may wish to consider in order to ensure they are adopting best practices in their compliance with the 2024 UKCGC.

The Guidance consolidates the FRC’s previous guidance and includes a new section on good practice guidance relating to the management of board committees (which examines the role of board committees generally and then, more specifically, the role of each of the nomination, audit and remuneration committees).

With respect to the new board effectiveness declaration requirements introduced pursuant to the changes to Provision 29 of the 2024 UKCGC, the Guidance very deliberately does not guide boards on which frameworks or standards to use when assessing the effectiveness of material controls. The FRC has sought to avoid being prescriptive in this regard and instead allow companies to decide for themselves how best to review and report on the effectiveness of their controls.

Conclusions

In line with the FRC’s announcement in November 2023 and against the backdrop of concerns raised in the feedback received from its consultation launched in May 2023 regarding the impact on public companies of increasing reporting and regulatory burdens, many of the initial proposals to overhaul the UK corporate governance framework were not taken forward, and ultimately only a handful of the initial 18 proposed changes to the 2018 version of the Code were incorporated in the 2024 UKCGC. For example, proposed changes to board and audit responsibilities for sustainability and ESG reporting and to annual statements on financial resilience, distributable profits and distribution policies were dropped.

Is this a missed opportunity to further strengthen the UK’s corporate governance framework recognising good governance leads to greater operational efficiencies over the longer term or is moving closer to a principles-based framework in which companies and investors work together to ensure appropriate governance and reporting arrangements the flexibility that is needed to strike a critical balance between the promotion of high standards of corporate governance and enhancing the attractiveness of being a public company and of London as a listing destination for issuers in particular? Time will only tell, but the FRC is clearly seeking to come across as mindful of this critical balance to be struck especially in these turbulent economic times for existing and prospective public companies.

 

---

^[1] Other than the requirement for a board declaration in connection with internal controls, which will come into effect from 1 January 2026.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.