FRC announces major overhaul of UK Corporate Governance Code

FRC announces major overhaul of UK Corporate Governance Code

The proposals form part of an ongoing overhaul of audit and corporate governance in the UK

FRC announces major overhaul of UK Corporate Governance Code

The Financial Reporting Council (FRC) has unveiled plans to revise its Corporate Governance Code for the first time in five years, aiming to bolster accountability among UK boards and directors.

The regulator’s proposals follow on from the government’s long-awaited response to a suggested shake-up of the UK’s audit and corporate governance regimes, which was triggered by the high-profile collapses of Carillion, Patisserie Valerie and others.

In an unexpected U-turn, the government’s response abandoned plans to create a tighter, US-style framework for internal controls, instead “inviting the regulator” to address the matter by strengthening the Corporate Governance Code.

The FRC has identified five key focal points among its proposed revisions. Among them are an increased focus on sustainability, an expectation of directors to disclose “material weaknesses or failures” and plans to strengthen company reporting on clawback arrangements affecting directors’ pay in the event of misconduct.

“We are pleased to launch this consultation on the proposed revisions to the Corporate Governance Code,” said Sir Jon Thompson, outgoing chief executive of the FRC.

“Good corporate governance contributes to long-term company performance by helping to build an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability, and business integrity.”

Market reaction

Echoing Thompson’s optimism, Hemione Hudson, head of audit at PwC UK, praised the regulator’s recognition of the importance of collective effort in bolstering UK PLC.

“It’s good to see progress being made and we welcome efforts to continue driving up standards,” she said.

“The Government and the regulator have previously acknowledged that all parties involved in the corporate reporting ecosystem have a part to play in maintaining and strengthening the UK’s reputation as a trusted and leading place to do business.”

But according to Ann Kiem, chief executive of the Chartered Institute for Internal Auditors, there is a glaring lack of emphasis on internal audit in the FRC’s new proposals.

“We welcome the proposals to strengthen company directors’ responsibilities for ensuring the internal controls are effective. However, we would also like to see the provisions in the Code regarding the requirement for premium-listed firms to have internal audit to also be strengthened and made clearer.

“At present the Code is not explicit that firms should have internal audit – we believe this is something that needs to change in order to enhance corporate governance.”

Wider responsibilities for boards and audit committees

In addition to measures concerning risk management and internal controls, one of the key focal points of the reforms is the drive for increased diversity and inclusivity in boardrooms. The proposal document argues that the FRC recognises the value of diverse perspectives, urging companies to take proactive measures to enhance gender and ethnic representation at senior levels.

The proposed reforms also emphasise the importance of widening the pool of talent during board recruitment, prioritising broader skillsets and experiences.

Sustainability and climate-related issues also feature prominently. The proposals stress the need for companies to integrate sustainable development goals into their corporate strategies, encouraging long-term thinking and responsible decision-making. To ensure effective oversight and transparency in these areas, the code suggests establishing dedicated board-level committees to oversee sustainability matters.

“When the new Code is issued it will be part of a wider framework of measures that will improve accountability, build trust and support investment and stewardship decisions in the UK,” said David Styles, director, corporate governance and stewardship at the FRC.

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