UK Corporate Governance Code consultation: its impact on UK-listed firms

The Financial Reporting Council (FRC)’s latest consultation, focusing on internal control, assurance and resilience, represents the latest indication of its intended direction of travel with regards to the UK Corporate Governance Code.

The Code is a benchmark (that sits alongside regulatory requirements) frequently used to assess the adequacy of governance frameworks at UK-listed firms.

FRC consultation link

The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

The strengthening of the Code by the FRC, in alignment with its supervisory regulatory priorities –corporate reporting, climate risk and ESG, risk management, resilience - confirms the importance that the regulator has placed on companies maintaining an effective governance and controls framework.

While many of our banking clients, tend to exhibit more mature and effective governance frameworks compared to other financial services firms or listed corporates, board members and senior management across the banking industry will need to have increased focus on managing risk and developing resilience, including threats to business continuity, supply chain and cyber security.

The FRC is looking to apply the revised Code to accounting periods commencing on or after 1 January 2025. Responses to the consultation document are requested by 13 September 2023.

Proposed changes to the existing Code

While a number of key changes are being proposed, the FRC is seeking to maintain the clarity and structure of the existing Code.

1 - Board leadership and Company purpose

Most significantly within this section, the FRC has proposed introducing a further principle, setting out the expectation that companies should, when reporting on governance activity, focus on activities and outcomes to be able to demonstrate the impact of governance practices.  

2 - Division of responsibilities

Rather than introduce a cap on the number of board appointments that may be held by UK-listed Board directors to address investor concerns, the FRC is now making two proposals in this area:

  1. Specifying (within current Principle L) that the annual board performance review should consider each director’s commitments to other organisations, including how directors are able to make sufficient time available to carry out their role effectively; and
  2. Specifying (within Provision 15) that annual reports should include more information on director’s other commitments and how they manage these.

3 - Composition, succession and evaluation

To support the regulatory focus and market initiatives in respect of diversity and inclusion, the following amendments are being proposed:

  • Including a reference to inclusion, and giving equal weight to all protected and non-protected characteristics, within current Principle J
  • Clarifying company approaches to succession planning and senior appointments within Provision 23, including the reporting of these arrangements.  
  • Clarifying the duty of Chairpersons to commission board performance evaluations.

4 - Audit, risk and internal control

The most substantial proposed changes to the Code are likely to feature within Section 4 on Audit Risk and Internal Control. In particular:

  • Reflecting wider responsibilities of boards and audit committees for sustainability and ESG reporting, including the responsibility of audit committees for describing their work in this area, within firms’ annual reports
  • Enhancing boards' responsibilities for reporting to shareholders on their work to maintain effective risk management frameworks
  • Including a new provision asking boards to declare whether they can reasonably conclude risk management and internal controls have been effective
  • Asking boards to explain in their annual reporting how it has assessed their firm’s future prospects (e.g., via a Resilience Statement).

5 - Remuneration

The FRC is proposing a number of amendments to the Code to strengthen the requirements of firms in respect of remuneration including:

  • Strengthening the links between companies’ remuneration policies and broader corporate performance
  • Including details of malus and clawback provisions within remuneration reports; and
  • Probing as to how firms’ executive remuneration structures support company strategy and ESG objectives.

For more information please contact BDO’s governance and board effectiveness specialists, Shrenik Parekh, or Jennifer Cafferky.