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Corporate Compliance

United Kingdom: FRC publishes revised UK Corporate Governance Code

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In brief

The FRC has this week published the revised version of the UK Corporate Governance Code (UK Corporate Governance Code 2024 (frc.org.uk)). As flagged in its policy update statement in November (Statement: FRC policy update), the revised Code makes much more limited changes than those proposed in the FRC’s initial consultation paper from May (UK Corporate Governance Code consultation document (frc.org.uk)).

The majority of changes will take effect for financial years beginning on or after 1 January 2025, with the exception of revised Provision 29, which will take effect a year later. The FRC will also publish updated guidance on Monday 29 January to sit alongside the revised Code. 

Comment

Several of the FRC’s original proposals were not well received in the market and companies will breathe a sigh of relief that the changes that are being made are much less extensive and easier for companies to implement. The surprise withdrawal by the Government in October last year of the draft secondary legislation that had been published in July built on its white paper on restoring Trust in Audit and Corporate Governance meant that the FRC had a clear basis for substantially revisiting its proposals and the fact that it has done so and listened to market concerns about the potential burden on companies is helpful. The timeframe for the changes also seems sensible, with companies having a good period to digest and adapt to the changes before the first reporting will be due for years starting on or after 1 January 2025, with companies also having an additional year to prepare for perhaps the most onerous new requirement, being the board declaration as to the effectiveness of the company’s material internal controls.

In depth

Key changes being made

The key changes being proposed can be summarised as follows.

Section 1 – Board leadership and company purpose:

  • The revised Code introduces a new Principle C stating that governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives. This wording has been amended since the consultation and guidance on it will be included in the guidance to be published by the FRC on 29 January. 
  • Provision 2 on culture has been expanded to require that boards should not only assess and monitor culture, but also how the desired culture has been embedded.

Section 2 – Division of responsibilities:

  • Section 2 is substantively unchanged from the current version of the Code. 

Section 3 – Composition, succession and evaluation:

  • In Section 3, the main change is to amend Principle J to remove references to specific diversity characteristics and instead focus on a more general requirement for appointments and succession planning to promote diversity, inclusion and equal opportunity.
  • The FRC has also changed the terminology used in relation to board evaluations, which have been renamed board performance reviews.

Section 4 – Audit, risk and internal control: 

  • Section 4 is where the majority of the changes to the Code are made. The FRC has amended Principle O to make the board responsible not only for establishing, but also for maintaining the effectiveness of, the risk management and internal control framework. 
  • To avoid duplication, the FRC has deleted language in the provisions that overlaps with the Minimum Standard for Audit Committees and the Code instead refers to that Standard. 
  • Perhaps the most onerous changes are to Provision 29 (justifying the move to give companies an additional year to prepare for this provision coming into effect). The requirement for the board’s annual review of the effectiveness of “all material controls” now extends to “reporting” in addition to “financial, operational and compliance” controls. Boards will then be required to provide in the annual report:
    • A description of how the board has monitored and reviewed the effectiveness of the framework.
    • A declaration of effectiveness of the material controls as at the balance sheet date. 
    • A description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues. 

Section 5 – Remuneration:

  • Provision 37 has been amended to provide that directors’ contracts and/or other agreements or documents which cover director remuneration should include malus and clawback.
  • A new provision 38 then provides for information on malus and clawback to be covered in the remuneration report, including:
    • The circumstances in which malus and clawback provisions could be used.
    • A description of the period for malus and clawback and why the selected period is best suited to the company.
    • Whether the provisions were used in the last reporting period (and if so, a clear explanation of the reason). 
  • Provision 40, setting out factors that the remuneration committee should address when determining executive director remuneration, has been deleted on the basis that it has tended to result in lengthy and boiler plate reporting.

Significant changes no longer being taken forward

The majority of the proposals set out in the FRC’s May consultation have not been taken forward. The feedback statement published alongside the revised Code (UK Corporate Governance Code Feedback Statement (frc.org.uk)) goes through and explains the rationale for the differences between the original proposals and the changes ultimately made. 

The more material proposed changes that have not been taken forward include the following.

  • The changes based on the Government’s draft secondary legislation stemming from its white paper on restoring Trust in Audit and Corporate Governance have been abandoned following the withdrawal of that secondary legislation. These proposals had included in particular:
    • A requirement for companies to have an Audit and Assurance Policy
    • Changes to align with the draft secondary legislation’s proposal to introduce a Resilience Statement requirement for large Public Interest Entities, in place of the viability statement.
  • Changes designed to address investor concern in relation to potential “overboarding” of directors.
  • Changes to some of the provisions of Section 3 including relating to diversity targets and the nomination committee reporting on work undertaken around succession planning and diversity.
  • A proposed new requirement for audit committees to engage with shareholders and other stakeholders on, inter alia, the role of the audit committee and the scope of work of the external auditor.
  • Proposals to give the audit committee a new responsibility for monitoring the integrity of narrative reporting, including sustainability reporting.
  • Proposals to revamp the Principles in Section 5 to strengthen the link between remuneration and ESG objectives and to add a reference to workforce pay and conditions as a factor for the remuneration committee to consider when exercising discretion.
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Robert Adam is a partner in the Firm’s Corporate Group in London and is the Corporate Know How and Training Partner. He joined Baker McKenzie as a trainee in 1998 and became a partner in 2008. Robert was seconded to the Takeover Panel for two years and also spent seven months as a partner on secondment at British American Tobacco. Robert sits on the Law Society Company Law Committee and is listed in The Lawyer's Hot 100.

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Nick is a partner in Baker McKenzie's London office and a member of the M&A and Corporate Finance teams. Before joining Baker McKenzie, Nick was a partner in another international law firm for over 14 years and was the head of Middle East and based in Dubai from 2007 to 2010. Nick spent one year on secondment to a San Francisco law firm between 1999 and 2000.

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Jo Hewitt is a partner in the Corporate Department in Baker McKenzie's London office. Jo has a particular focus on advising multinational groups on the structuring, implementation and management of complex corporate reorganisation projects including post-acquisition integrations, holding company restructurings and group rationalisations. She is part of a dedicated team in London focused on international reorganisations and business transformation projects.

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George is a partner in the Corporate Finance practice group in London. George's practice is focused on equity securities offerings of all types, as well as mergers and acquisitions, corporate advisory and general corporate work across a number of industry sectors in both mature and emerging markets. He regularly advises a range of corporate and investment bank clients and his industry sector focus is financial institutions. George is ranked in the UK’s Legal 500 2023 as a “Next Generation Partner” (Mid-Large Cap, Equity Capital Markets) and noted for his experience on transactions in the GCC and “detailed knowledge of the Middle East”. He is recommended in particular as “excellent on Saudi deals” (UK Legal 500 2021). George has experience of working in both London and Hong Kong for a variety of clients across EMEA (particularly in the Middle East) and Asia Pacific. He also has broad capital markets experience across a range of listing venues, including London, Riyadh and Hong Kong.

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James is a Partner in the Corporate Finance Department. James joined Baker McKenzie as a Partner in January 2016 from another multinational law firm, having been predominantly based in the London office, but also having spent time in the New York and Singapore offices. He began his career in the Sydney office of a renowned law firm and has spent time as a consultant to Barclays' M&A Legal team. James is a member of TheCityUK's Capital Markets Group.
James is a public M&A practitioner, with deep blue-book experience, having acted for international bidders seeking control of Code-governed companies, for UK targets and also as cash confirmation counsel to financial advisers across the City. He has acted as international counsel for both bidders and targets involving companies listed in other European jurisdictions.
On the capital raisings side, James has been prolific over the years, acting for both issuers and underwriters on IPOs, rights issues, placings and open offers both in the UK and across EMEA. Issuers value his proactivity and commerciality and banks his depth of knowledge and practical experience of a multitude of forms of underwriting and transaction structures, as well as the UK sponsor regime. Beyond London, he has advised on equities transactions involving issuers listed in Amsterdam, Brussels, Copenhagen, Frankfurt, Johannesburg, Paris, Saudi Arabia, Stockholm, Tallinn and Warsaw.

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