Changes to the UK Corporate Governance Code

The Financial Reporting Council (FRC) have issued an updated UK Corporate Governance Code (“the Code”), in the wake of their consultation in September 2023. The government requested that the FRC adopt a Code-based strategy to focus attention on internal control within boardrooms instead of implementing new legislation. The introduction of targeted changes have been imposed to further promote trust, transparency and accountability in UK companies.  All provisions, except Provision 29 come into effect on 01 January 2025. Provision 29, which is the most significant change, introduces new reporting obligations and will come into effect on 01 January 2026. A summary of the changes to the Code can be found below.

At Objectivus, we recognise the complexities involved in not only meeting but also upholding the ever-changing standards set forth by regulatory bodies. Our corporate governance experts are adept at providing industry-specific guidance to ensure the Code is successfully embedded. For expert advice or support regarding any of the areas discussed, feel free to contact us.

Section 1 – Board Leadership and Company Purpose

Principle C: Has been reworded to require companies to enhance governance reporting to focus on board decisions and outcomes in relation to the company’s strategy and objectives. Clear explanations are required for departures from the Code’s provisions.

Provision 2: Amended to require the board to not only assess, and monitor culture, but also address how the desired culture has been embedded.

Section 3 – Composition, Succession, and Evaluation

Principle J: Amended to promote diversity, inclusion, and equal opportunity more broadly, removing references to specific groups to allow diversity policies to be wide-ranging.

Provision 23: Has been amended to reflect that companies may implement additional initiatives beyond their diversity and inclusion policy.

Section 4 – Audit, Risk, and Internal Control

Principle O: Has been expanded to make clear the board is not only responsible for establishing but also maintaining an effective risk management and internal control framework.

Provisions 25 and 26: Have been updated to reflect the Minimum Standard, removing duplicative language. For example, Provision 25 now states that the main role and responsibility of the audit committee is to follow the Minimum Standard and Provision 26 states the annual report should describe the work of the audit committee including matters set out in the Audit Committees and External Audit: Minimum Standard.

New Provision 29: The introduction of this Provision requires companies to not only monitor its risk management and internal control framework and carry out a review of its effectiveness on an annual basis, but to now also include in the annual report:

1. a description of how the board has monitored on an ongoing basis and reviewed at least annually the effectiveness of the risk management and internal control framework;
2. a declaration of effectiveness of the material controls as at the balance sheet date. The FRC states that “material controls” will be company-specific and thus will defer depending on the company’s business model, strategy, size, operations, structure, and complexity; and

• a description of any material controls which have not operated effectively as at the balance sheet date, including any action taken, or proposed, to improve the controls, and any action to address previously reported issues.

Section 5 – Remuneration

Provision 37: Amended to require directors’ contracts to include malus and clawback provisions to enable the company to recover or withhold remuneration and specify the circumstances in which it would be appropriate to do so.

New Provision 38: This new Provision requires companies to describe their malus and clawback provisions in the annual report, including the circumstances in which they may be used, the period these provisions apply and why the period selected best suits the company and whether malus and clawback provisions were used in the last reporting period, and if so, why.

The Code also reaffirms the ‘comply or explain’ approach to reporting.

The updated Code will apply to financial years commencing on or after 1 January 2025. Provision 29 relating to board declarations on the effectiveness of risk management and internal control frameworks is effective from 1 January 2026. The January 2026 effective date will allow boards time to enhance their existing internal control processes as well as implement the new requirements.