On 22 January 2024, the Financial Reporting Council (FRC) published the revised Corporate Governance Code 2024. The revisions aim to enhance transparency and accountability across UK plc, while supporting growth, competitiveness, and the UK’s attractiveness as a destination for investment.

The journey to the revised Code began in 2021, when the government launched a consultation titled “Restoring trust in audit and corporate governance”, which received more than 600 responses. Following this, on 31 May 2022, the FRC commenced a consultation on revisions to the Code to address the issues raised by the government.

It was widely expected that the government would include a bill on audit and corporate governance in the King’s Speech on 7 November 2023. However, its omission came as a surprise. As a result, the long-awaited legislative and regulatory reforms are now unlikely to be implemented before the next general election.

In a statement issued on 7 November 2023, the FRC confirmed that it would not proceed with the majority of its proposed changes following the government’s withdrawal of legislation. Nevertheless, it indicated that updates relating to internal controls would still be implemented.

The revised Code will be applied in two phases. Most of the changes will apply to financial years beginning on or after 1 January 2025, while the revisions relating to internal controls will take effect from 1 January 2026. The key question now is how these changes will impact listed companies.

Internal control changes

The FRC has kept changes to the code modest, making only the necessary changes, and, prioritising those concerning internal controls (Provision 29).

The principles in section four (audit, risk, and internal control) mostly remain the same in that:

• the board should establish formal, transparent policies and procedures. These should ensure the independence and effectiveness of both internal and external audit functions, and satisfy on the integrity of financial and narrative statements;
• the board should present a fair, balanced, and understandable assessment of the company’s position and prospects; and
• the board should establish and maintain an effective risk management and internal control framework. It should also determine the nature and extent of the principal risks the company is willing to take to achieve its long-term strategic objectives.

The major change is to Provision 29 of the code

Risk management and internal controls

The Code has been revised to explicitly include reporting in addition to financial, operational, and compliance controls.

The FRC also recognises that the level of maturity of non-financial controls for some businesses may not be, or need to be, as mature as for their financial controls. It is for the board to determine what level of maturity is right for its business and its levels of required assurance in relation to the effectiveness of these controls.

Declaration of annual reports

The revised Code states that the board should provide the following in the annual report:

• a description of how the board has monitored and reviewed the effectiveness of the framework;
• a declaration of the effectiveness of the material controls as of the balance sheet date; and
• a description of any material controls that have not operated effectively as of the balance sheet date, the actions taken, or proposed, to improve them, and any actions taken to address previously reported issues.

Materiality

It is for a board to determine what should comprise its material internal controls.

Application of the provision

The provision will apply for financial years beginning on or after 1 January 2026.

Other changes

A small number of other, more minor, changes have been made to the code that aim to better streamline the expectations and clarify the language.

Malus and clawback

Provision 37 has been updated so that:

• directors’ contracts and/or other agreements or documents that cover director remuneration should include malus and clawback provisions. These would enable the company to recover and/or withhold sums or share awards and specify the circumstances in which it would be appropriate to do so.

Provision 38 states that:

• the annual remuneration report should include a description of its malus and clawback provisions, including:

- the circumstances in which malus and clawback provisions could be used;
- a description of the period for malus and clawback, and why the selected period is best suited to the organisation; and
- whether the provisions were used in the last reporting period. If so, a clear explanation of the reason should be provided in the annual report.

Roles and responsibilities of the Audit Committee

The wording of provision 25 relating to the Audit Committee’s roles and responsibilities concerning external auditors has been simplified to include the following:

• the Audit Committees and the external audit: minimum standard.

Similar simplifications were made to the wording of provision 26. These changes affect how the Audit Committee’s work with external auditors is reported and will now include:

• the matters set out in the Audit Committees and the external audit: minimum standard.

The objective of this revision is to avoid duplication between the code and the minimum standard.

Board effectiveness reviews

The revised code states that the chair should now commission a regular externally facilitated board performance review rather than just consider it.

Application of the provisions

The above provisions will apply for financial years beginning on or after 1 January 2025.

How we can help

If you would like to discuss the contents of this paper or the support we can provide on corporate governance matters, please contact Shingo Soga, Jed Turnbull, or Andrew Gibson.