FRC consultation on the UK Corporate Governance Code has closed. What happens next and what should you be doing to prepare?

FRC consultation on proposed revisions to the UK Corporate Governance Code (‘the Code’) closed on 13 September. MM&K has taken the opportunity to submit responses to the 26 consultation questions.

The last revision to the Code was in 2018. This latest consultation follows a raft of laws and regulations, much of it to do with calls to restore trust in audit and governance. Specific examples include but are not limited to:

• Chartered Governance Institute guidance on the reporting of board performance reviews, January 2021;
• FCA Policy Statement 22/3 about D&I on company boards and in executive management, April 2022;
• Audit Committee Minimum Standard for external audit (2022) applicable to FTSE350 companies announced by FRC on 23 May 2023;
• Draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations, laid before Parliament in July 2023 and applicable to 750:750 Public Interest Entities (‘PIEs’).

The Amendment Regulations referred to above require PIEs to prepare:

• an annual ‘Resilience Statement’ explaining how they manage risks and build resilience into their business models
• an annual statement of distributable profits and distribution policy
• an annual statement about the risks of fraud and steps taken to prevent it
• an audit assurance policy.

Clearly, where trust has been eroded, steps must be taken to restore it, which might take some time. Other factors driving reform include:

• a widely recognised need to encourage greater numbers of companies to list their shares in London, following the recent exodus and reduction in the numbers of London IPOs
• a desire to improve transparency and to encourage companies to report outcomes, not aspirations
• concern about the increasing length of annual reports, which makes it difficult for users to glean the information of most interest and importance to them.

We observe a shift in the balance of the UK’s approach to corporate governance legislation and regulations, which separates the UK’s largest companies from other Code companies. The Audit Committee Minimum Standard and draft regulations amending the contents of Strategic and Directors’ Reports apply exclusively to FTSE350 companies and PIEs, respectively. However, proposed revisions to the Code regarding risk management, audit and internal controls will, if adopted, require all Code companies to report against the provisions of the Audit Minimum Standard and Resilience Statement – regulations and proposed laws that are not, and are not intended to be, applicable to those companies. This drives a coach and horses through the principle of proportionality.

Guidance notes to the proposed Code changes claim that ‘comply or explain’ will level the playing field. Whilst we support the principle of ‘comply or explain’, we question how much use it will be to mid- and small-sized companies if the benchmark against which explanations of non-compliance are measured by time-constrained investors and other stakeholders is the benchmark set for the largest companies. This makes two-way engagement even more important. Moreover, whether a Code requirement is contained in a Principle or a Provision affects the availability of ‘comply or explain’. UK Listing Rules require companies to apply Code Principles. They may invoke ‘comply or explain’ only in relation to Code Provisions.

In summary, we are concerned that the proposed revisions to the Code:

• do not adhere to the principle of proportionality
• will increase the burden of compliance, in terms of both time and costs, for many companies (and, in particular, audit committees) that do not have the resources, and should not be required, to bear it
• risk presenting London as a less attractive market for both existing and prospective listed companies
• are likely to result in yet longer annual reports.

Latest indications from the FRC are that a revised Code should be available in final form by the end of this year. In practice, however, the timing is likely to be dependent on responses to the consultation. The FRC intends that the revised Code will apply to accounting years commencing on or after 1 January 2025 to allow sufficient time for implementation.

In the meantime, we recommend that:

• Code companies continue to monitor the progress of draft legislation through Parliament and FRC announcements about progress towards finalising the revised Code
• a similar approach is adopted by companies planning an IPO in London
• all Code companies and potential Code companies not subject to the rules relating to PIEs or FTSE350 companies, begin thinking about changes they might need to make and processes/protocols they might need to initiate to comply with new regulations regarding risk management, audit and internal controls, should they be adopted.

We will be monitoring progress and will issue information notes, as the picture becomes clearer. If you wish to read our responses to the FRC consultation on revisions to the Code, please click here.

Bear in mind that, currently, the Code applies to all companies with a premium listing on the London Stock Exchange, wherever they may be incorporated. However, including new reporting requirements not widely present in overseas territories will increase the burden on overseas companies wishing to list in London and risks causing them to consider other markets.

Companies traded on AIM and which have adopted the QCA Code, should note that the QCA is currently working on revisions to its corporate governance code. We look forward to reviewing the new QCA corporate governance code in due course.

MM&K is an independent advisory firm specialising in director and executive remuneration, performance and associated governance. If you would like to discuss anything in connection with this article, please contact Paul Norris.

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