7 november 2023 Lucy Reeve Capital Markets - Equity - Corporate Governance - ESG

FRC abandons some but not all changes to UK Corporate Governance Code

The Financial Reporting Council has changed its approach to proposed changes to the UK Corporate Governance Code following concerns raised in feedback. It will push ahead with reforms on internal controls but these will be changed to reflect feedback and to ensure that UK listed companies do not end up with a “Sox lite” regime. 

Background

The FRC published a consultation in May (see here) which proposed a number of changes to the Code, as part of a package of reforms to restore trust in audit and corporate governance following a string of high profile corporate failures. In October, the Government separately withdrew draft reporting regulations which formed another key part of the reform package (see here). The third part of the package was to be reforms to replace the FRC with a new authority (ARGA) with greater powers. The King’s Speech on 7 November did not mention the legislation that would be needed to create ARGA, which means that it is unlikely to be brought forward during this Parliament. Following the Speech, the FRC has announced its disappointment at this omission and has also set out its revised approach to the proposed Code changes, many of which attracted significant criticism from consultees. 

What’s in and what’s out?

  • Various changes to remove overlap and duplication will go ahead.
  • Changes on internal controls will be included but will be amended to reflect concerns raised and ensure a more “targeted and proportionate” change to the Code, and to ensure that UK listed companies are not required to comply with the more intrusive US style regime (referred to by many as “Sox lite”).
  • Proposed changes that will not be taken forward include those relating to:
    • the role of audit committees on environmental and social governance;
    • diversity;
    • over-boarding;
    • Committee Chairs engaging with shareholders; and
    • the now withdrawn reporting regulations (e.g. in relation to the audit and assurance policy).

What next?

The FRC will publish a revised Code in January 2024. Its next priority will then be to engage with stakeholders on how best to review the Stewardship Code.

The FRC also intends to seek advice from its Stakeholder Insight Group on possible improvements to its current and planned guidance associated with the Code, to ensure the right balance is struck between supporting effective governance and reducing unnecessary burdens. 

Click here for the statement.