As spring approaches and the long-deferred Audit and Corporate Governance Reform Bill is but a distant memory, it was pleasing to note a ray of sunshine in January, with the publication of the Financial Reporting Council’s (FRC) 2024 Corporate Governance Code. The supporting guidance was also published a week later; interestingly, the FRC has been at pains to make clear the guidance is not part of the code but rather a separate, helpful collection of information designed to aid its application to different companies’ needs.

The FRC intends to update this from time to time to reflect, where appropriate, other reporting or regulatory requirements that may develop in the UK from other regulators. Its digital presentation should support more efficient updates.

So where did the FRC finally land following a consultation that attracted considerable stakeholder attention, and not just in the UK? Thankfully, in a reasonable place, from our perspective. The draft code previously exposed for consultation just went too far in what it was expecting from boards of directors in relation to internal controls.

Indeed, the consultation appeared to reignite the debate as to the proportionality of the government’s wider set of audit and corporate governance reform proposals, which may have led to the unfortunate withdrawal of its draft corporate regulations in October. If enacted, these would have seen the introduction, among other things, of audit and assurance policy statements and resilience statements for certain larger entities, which we believe would have enhanced the UK’s corporate reporting environment.

Declaration of effectiveness

The main change to the extant Corporate Governance Code (2018 version) is the inclusion of a provision for directors to provide an attestation on the effectiveness of their company’s material internal controls. This covers all material controls, ie reporting (not just financial), operational and compliance.

ICAS welcomes the inclusion of the need for a declaration from directors, but concurrently has listened to the broad swell of opinion and adopted a more proportionate approach. The FRC’s exposed proposal was that the declaration should relate to “whether the board can reasonably conclude that the company’s risk management and internal control systems have been effective throughout the reporting period and up to the date of the annual report”. The finalised version states: “…a declaration of effectiveness of the material controls as at the balance sheet date”.

The decision to focus specifically on “material controls”, and at the balance sheet date, ensures that the code’s provisions will be more proportionate than originally proposed. Pleasingly, the role of the board is emphasised here, as it is throughout the code. It is made clear that it is for a board to determine what should comprise the company’s material internal controls to reflect its specific circumstances and business model.

In our response to the FRC’s consultation, we also called for transitional relief to allow companies more time to prepare for having to make their respective declarations. We therefore welcome that this particular revised provision will not become effective until financial years beginning on or after 1 January 2026 – one year after the rest of the revised code takes effect.

“We welcome the new amendment that boards should not only assess and monitor culture, but also how the desired culture has been embedded”

Other changes have also been made. In particular, we welcome the improved clarity that the “comply or explain” principle offers flexibility and does not force a company to comply in circumstances where the board reports on departures from the code’s provisions. Instead, it is preferable to have a good explanation demonstrating sound governance, rather than compliance with a specific code provision that does not suit the company’s circumstances. While this is a positive development there is work for the FRC to do to get this message embedded among all stakeholders.

We also welcome the new amendment that boards should not only assess and monitor culture, but also how the desired culture has been embedded, as this can have a significant impact on ethical behaviour.

All in all, the overriding conclusion is that the FRC has listened to the feedback provided by its stakeholders and ensured that the UK Corporate Governance Code remains an international benchmark well worthy of continued export.

Read the revised 2024 UK Corporate Governance Code. The FRC has also produced a key changes document and guidance