February 6, 2024 FRC revises Corporate Governance Code
On the 22nd January 2024 the Financial Reporting Council (FRC) issued a revision of the Corporate Governance Code which applies to all companies with a premium listing on the London Stock Exchange. Following on from the FRC’s decision in 2023 to tone down planned revisions, the new code largely follows the principles set out in the 2018 code with the ‘comply or explain’ approach being retained.
Nevertheless, there are some substantive changes within the body of the new code which will require boards to revisit their approach. Key amongst these is the new Provision 29 which requires boards to monitor their organisation’s risk management and internal control framework and “at least annually, carry out a review of its effectiveness.” The review will have to take in all material controls including financial, operational, reporting, and compliance controls. This will need to feed into the annual report with the board commenting on:
- How it has monitored and reviewed the effectiveness of the framework;
- The effectiveness of the material controls as at the balance sheet date;
- Any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.
This new requirement follows on from the FRC’s decision to prioritise internal controls in its updated code. It anticipates that incorporating the necessary reviews and reporting procedures within the company framework could take some time and therefore has set the Provision 29 implementation to apply to financial years on or after 1 January 2026.
All the other provisions within the new code will apply for annual reports for accounting periods beginning on or after 1 January 2025. Changes include a shake up to governance reporting and culture with boards needing not only to assess and monitor culture but also report on how the desired culture has been embedded within the company. The approach to diversity models has also been tweaked with specific diversity characteristics being deleted from the code in order to free up organisations to bring in more wide-ranging diversity policies.
The emphasis on internal controls is also reflected in a tweak in approach to risk; with the board not only being charged with establishing the risk framework but also maintaining its effectiveness. And when it comes to the board, the code now requires annual reports to comment on malus and clawback provisions included within directors’ remuneration agreements.
Commenting on the revised Code, the FRC’s CEO Richard Moriarty said: “The small, but important, change to the expectations on Internal Controls will better support Boards asking the right questions at the right time to help them gain the level of the assurance they require and to be able to demonstrate good governance to investors to and other stakeholders.”
