On 22 January 2024, the Financial Reporting Council (FRC) published a revised UK Corporate Governance Code (2024 Code). The 2024 Code includes a limited number of targeted changes, with the primary revision being the new requirement for boards to make an annual declaration as to the effectiveness of their internal controls (Provision 29). This change is representative of the increasing importance of non-financial disclosures.
Application
The 2024 Code is applicable to all companies with a premium listing, whether incorporated in the UK or elsewhere. The 2024 Code will apply to financial years beginning on or after 1 January 2025, save for Provision 29, which will apply to financial years beginning on or after 1 January 2026.
Key updates
The key updates in the 2024 Code include the following:
- New Principle C provides that governance reporting should focus on board decisions in the context of a company's strategy and objectives, in order to avoid boilerplate and generic reporting.
- Provision 2 has been developed to require boards not only to only assess and monitor culture, but also how the desired culture has been embedded. Boards should continue to seek assurances from management that corrective action has been taken if they believe that a company's culture does not align with its purpose, values and strategy.
- Principle J has been amended to promote diversity, inclusion and equal opportunity in the context of board appointments and succession plans for the board and senior management. The 2024 Code does not include a list of diversity groups or characteristics, acknowledging that diversity and inclusion can be applied as widely as a company prefers.
- Principle O has been amended to make boards responsible not only for establishing, but also for maintaining the effectiveness of, the risk management and internal control framework.
- Provision 25 and Provision 26 have been updated to require audit committees to follow and report against the Minimum Standard on Audit Committees and the External Audit (published by the FRC in May 2023). This standard draws together text from existing publications including the 2018 Code and the FRC’s Guidance on Audit Committees.
- Provision 29 relating to board disclosures on internal controls has been developed. The 2018 Code required boards to monitor a company's risk management and internal control framework and carry out annual reviews of its effectiveness. The 2024 Code includes more prescriptive requirements as to how boards should report on this review. In the annual report, boards will need to include:
- disclosure on how the board has monitored and reviewed the effectiveness of the framework
- a declaration as to the effectiveness of the material controls as at the balance sheet date, and
- a description of any material controls which have not operated effectively as at the balance sheet date, any remedial action taken (or proposed) to improve them and any action taken to address previously reported issues.
Provision 29 expressly refers to reporting controls, together with financial, operation and compliance controls, when detailing the material controls to be covered by the board's monitoring and review.
- Provision 37 has been amended to include that directors’ contracts and/or other agreements which cover director remuneration should include malus and clawback provisions. Details of these provisions will need to be included in the annual report, including an explanation of any exercise of the provisions in the period covered by the report.
The 2024 Code continues to apply the well-established “Comply or Explain” regime. The FRC has encouraged boards and investors to actively support the flexibility within the framework to ensure governance expectations are better tailored to the specific circumstances of each company.
Further information
The FRC published more detailed guidance on the 2024 Code on 29 January 2024, which can be found here. The FRC has also published the FRC's summary of key changes as well as the FRC’s UK Corporate Governance Code 2024 mythbuster.
If you have any questions, or would like to discuss any of the above, please get in touch with your usual Taylor Wessing contact.
