FRC revises corporate governance code

January 26th, 2024

The Financial Reporting Council (FRC) has announced revisions to the UK Corporate Governance Code that enhance transparency and accountability, primarily through an update to how boards approach internal controls.

The FRC said changes will aim to help support the growth and competitiveness of the UK and its attractiveness as a place to invest.

Existing expectations for internal controls in the code will remain, requiring boards to monitor the risk management and internal control framework and, at least annually, carry out a review of its effectiveness.

Boards are also expected to monitor and review all material controls, including financial, operational, reporting and compliance controls.

Under the changes, boards will now be asked to explain how they have reviewed effectiveness and their conclusions through a declaration in companies’ annual reports.

In response to stakeholder feedback, boards will have until 1 January 2026 before they start to the declarations, allowing them to develop and implement new approaches to internal controls.

In November, the FRC dropped proposals for revisions to the code related to the role of audit committees on ESG issues, expanding diversity and inclusion expectations, over-boarding provisions, and expectations on committee chairs’ engagement with shareholders.

Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “This is a more balanced approach from the FRC than had originally been proposed.

“The FRC has taken on board concerns from the AIC and others that the original proposals were poorly targeted and disproportionate.”

He added: “The decision to uphold the well-established principle of ‘comply or explain’ is welcome and emphasises the importance of investors and agencies carefully evaluating companies’ explanations where they diverge from the code. Many of our members are smaller companies, and this principle is particularly important for them.”

In December, the FRC identified climate-related risks, including Task Force on Climate-Related Financial Disclosures (TCFD), as one of its key areas of supervisory focus for 2024/25 financial year.