No respecter of election results, increased taxation or lower interest rates, UK corporate governance steadfastly marches forward into 2025

Having barely had time to digest the economic impact of higher tax rates, lower interest rates and the potential effects of the US election, UK companies continue to face the seemingly unstoppable wave of UK corporate governance.

Remuneration Governance

The QCA Corporate Governance Code, revised in November 2023 came into effect for accounting periods starting on or after 1 April 2024. As a result, from next year, remuneration disclosures by companies (principally AIM companies) that have adopted the QCA Code must take account of Code Principle 9.

Like the UK Corporate Governance Code, the QCA Code is based on the principle of ‘comply or explain’. The QCA Code takes a more flexible and less prescriptive approach to remuneration governance than the UK Code but, despite that, it heaps a heavier remuneration compliance burden on small and medium-sized companies, where none previously existed.

Compliance with Principle 9 requires more than simply making additional disclosures. Boards will need to think about and explain their remuneration policies and make decisions about putting them to a shareholder vote. Use this link for more details about the practical impact of Principle 9 link here.

For larger listed companies, the UK Corporate Governance Code (revised in January 2024) takes effect for accounting periods starting on or after 1 January 2025, except for Provision 29 about reporting on the effectiveness of risk management and internal controls. Compliance with Provision 29 is required for accounting periods starting on or after 1 January 2026.

UK Stewardship Code

The FRC has published its promised consultation paper on the UK Stewardship Code. It intends to publish a new Stewardship Code in the first half of 2025. The consultation period on changes to the Stewardship Code ends on 19 February 2025. We will be submitting a response.

The proposed updated Stewardship Code included in the consultation paper redefines stewardship as ‘the responsible allocation, management and oversight of capital to create long-term sustainable value for clients and beneficiaries.’

The Stewardship Code is an important piece of UK corporate governance regulation. It is underpinned by the principle of ‘apply and explain’. The UK Corporate Governance Code, underpinned by ‘comply or explain’, impresses on company boards the need for engagement with investors (and other stakeholders). It is important that the Stewardship Code places a similar degree of emphasis on engagement by its signatories.

A core objective of the Code is to focus signatories on their clients’ and beneficiaries’ immediate and long-term objectives. Achieving that goal will require open and transparent engagement about investment beliefs and objectives and how stewardship helps to support them. The underlying principles of ‘apply and explain’ and ‘comply or explain’ must be seen to be working in practice.

The proposed updated Stewardship Code:

• recognises the different functions, roles and responsibilities of asset owners, asset managers, proxy advisors and investment consultants
• contains separate provisions applying to their specific roles in the investment chain
• also recognises the importance of engagement and requires signatories to disclose details of their engagement processes
• provides for less frequent reporting
• sets out Principles related to practices that, in the FRC’s view, reflect effective stewardship and why it is important
• provides reporting guidance to help signatories prepare the narrative to ‘tell their stories’
• does not amount to a set of rules prescribing actions that must be taken.

At first sight the direction of travel looks promising. That said, the success of the Code, as with all codes, will be measured by how it works in practice. We are focusing on the provisions relating to engagement – open and transparent conversations using Code principles as a guide and not as a set of rules.

Sustainability Reporting   

The latest twist in the UK regulatory tale is the FRC’s Competition Policy Team’s market study into the UK market for sustainability report assurance. In October, the FRC published its emerging findings, following an invitation to comment issued in March this year.

Many readers will be aware that there is already a raft of UK regulation about sustainability reporting (e.g., Companies Act, UK Sustainability Disclosure Requirements, TCFD, Streamlined Energy Carbon Reporting). Some may question the value of adding more.

However, there seems to be a question about sustainability report assurance and whether it should be mandatory, as it is under the EU Corporate Sustainability Reporting Directive, which also catches some UK companies.

It is important that companies report on sustainability and in the UK, many companies are required to do so. But information disclosed in a company’s sustainability report is not comparable with its income statement or balance sheet. Sustainability policies, processes and actions will differ from company to company. They will depend on business activities and the environment in which the company operates.

Sustainability report assurance has been justified on the ground that it builds trust between a company, its investors and other stakeholders, suggesting that boards cannot be trusted to report accurately. That may be true in some cases, but it is our experience that, whilst boards may complain about the amount of required disclosure, for the most-part they take care over their disclosure obligations.

The scope of required disclosure is clearly described by existing regulations. Mechanisms already exist to call boards to account for inadequate disclosure. If the engagement process functions properly, there should be no concerns about openness or trust.

Governance regulation should add value and be proportional. Admittedly, current sustainability reporting regulation is aimed at listed and large companies and LLPs but there are implications for costs and time commitments.

Proposed changes to the UK Corporate Governance Code (not implemented) would have applied legislation requiring an audit and assurance policy and a resilience statement, introduced only for the UK’s largest companies to other, smaller companies to whom that legislation was never intended to apply. That situation should not be replicated as sustainability regulation develops, which it inevitably will.

Please contact paul.norris@mm-k.com if you would like to raise any points in connection with this article

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