May 24, 2023 Revising the corporate governance code
In 2021 the Government launched a White Paper on ‘Restoring Trust in Audit and Corporate Governance.’ Some 600 comments were received, covering areas such as the expansion of regulation to large private companies, the need to flexibly account for the changing nature of the UK economy and the need for high standards in corporate governance.
Taking account of those responses the Financial Reporting Council (FRC) has on 24th May 2023 launched a public consultation on proposed revisions to the UK Corporate Governance Code. The code, which currently applies to companies with a premium listing on the London Stock Exchange and which also can be used by other organisations, was last revised in 2018.
The consultation seeks to expand the mandatory scope of the Corporate Governance Code to include larger private companies and those trading on AIM, subject to a £750m+ turnover and 750+ employee limit; treating them as public interest entities (PIEs). However, in the interests of proportionality, these new PIEs will not have to meet the same audit and reporting requirements as larger organisations.
The new proposals look to build on the existing code as well as strengthening governance requirements in particular with regard to directors’ responsibilities for internal control, risk, audit and corporate reporting. Importantly, the Government still prefers to go down the voluntary ‘comply or explain’ route rather than imposing legislated fixed reporting frameworks.
In order to further strengthen governance controls the consultation focuses on five primary areas:
- The need for a framework of prudent and effective controls to provide stronger evidence- based reporting.
- Reflecting the responsibilities of the board and audit committee in the areas of sustainability and ESG reporting.
- Incorporating new audit committee standards into the reporting matrix.
- Improving comply-or-explain requirements.
- Aligning the code with changes to legal and regulatory requirements.
In tandem with the consultation the FRC also intends to review existing guidance in areas such as audit committees, board effectiveness, risk management, internal controls and reporting. Comments on the consultation document should be sent to the FRC ([email protected]) by Wednesday 13 September 2023. In the interim, in order to help consultees to better understand the proposed changes the FRC are holding a number of round-table discussions. Details of these can be found on the FRC website.
Launching the consultation Sir John Thompson, CEO of the FRC said: “Good corporate governance contributes to long-term company performance by helping to build an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability, and business integrity. Enhancing the Corporate Governance Code will meet the needs of all corporate stakeholders, including investors, employees and suppliers, and boost the resilience of the UK economy, ensuring it continues to attract talent and investment.”