UK Corporate Governance Code consultation response

Companies with a premium listing on the London Stock Exchange (around 900 companies) are required to report against the UK Corporate Governance Code.

The Code is principles based, and companies are expected to apply these principles. More prescriptive recommendations are stated in the form of provisions (of which there are around 40). Companies may either comply with these provisions or explain their reasons for not doing so (‘comply or explain’). Hence of a degree of flexibility is allowed for in the application of the Code.

The current set of proposed reforms are not as wide-ranging as those made in 2018. The Code retains the same broad structure, with 5 sections relating to differing aspects of the role of the board of directors:

1. Board leadership and company purpose.
2. Division of responsibilities
3. Composition, succession and evaluation
4. Audit, risk and internal control
5. Remuneration

The main driver of the current proposed changes is the Government’s 2021 White Paper, ‘Restoring trust in audit and corporate governance’, which set out proposals to strengthen the UK’s framework for major companies and the way they are audited. The revisions to the Code are an important component of these reforms, and primarily relate to internal control, internal and external assurance, ESG reporting, the role of the audit committee and executive pay arrangements.

The revised Code will apply to accounting years commencing on or after 1 January 2025.

IoD’s view on proposed changes to the UK Corporate Governance Code

The Institute of Directors has today submitted its consultation response to the Financial Reporting Council in respect of proposed changes to the UK Corporate Governance Code.

The IoD is a strong advocate of a principles-based approach to corporate governance regulation. This underpins its overall support for the UK Corporate Governance Code.

In its response, the IoD sets out the following additional key points:

• Unlike some commentators, the IoD does not believe that the Code is deterring significant numbers of companies from listing in the UK. However, the FRC could better emphasise the flexibility inherent in the Code and the importance of avoiding a ‘tick box’ approach to assessing standards of governance.
• The Code must avoid being too prescriptive about how boards organise their activities. Boards are better placed than regulators to determine the best interests of their companies. For example, the FRC is recommending that the audit committee should take responsibility for ESG disclosures, controls, processes, and assurance. However, an individual board might reasonably determine that a sustainability committee, an ESG committee or the board as a whole is the more appropriate mechanism through which to oversee these areas – especially if the audit committee is already overburdened.
• IoD members are concerned about the substantial volume of reporting, declarations and disclosures which the Code and other regulatory requirements are imposing on companies. The Code should seek to obviate these concerns by minimising the reporting burden wherever possible. For example, when reporting on the effectiveness of their risk management and internal control systems, the Code should encourage companies to adopt a high threshold in terms of materiality, clarity and succinctness rather than a scattergun approach.
• Executive pay is a controversial issue, and the FRC are right to tighten the Code’s provisions in this area. It is important for the reputation of the entire UK business community that senior executives are not seen as being rewarded for failure or misconduct. The IoD supports greater transparency in the Code around malus and clawback, and also for their incorporation into employment contracts.