Last week, the UK Financial Reporting Council (FRC) published the final version of its updated Corporate Governance Code. The changes to the Code, which primarily revolve around the effectiveness of internal controls, will come into effect in January 2026.
When the FRC initially published a consultative draft of the Code in May 2023, it contained 18 proposed changes. These included heightened diversity reporting requirements and new audit committee responsibilities for environmental, social, and governance (ESG) issues. The FRC elected to do away with many of these reforms late last year in the name of industry competitiveness.
"A global reputation for high standards of corporate governance is a competitive advantage for UK plc and our revised Code helps this by enhancing transparency on internal controls, but in a way that is proportionate and minimises reporting burdens on businesses," said FRC CEO Richard Moriarty.
Many of the expectations surrounding monitoring and reviewing internal controls remain the same in the updated Code. However, the FRC now also asks that boards include a declaration in their annual report explaining how they have monitored and reviewed their controls throughout the year to evaluate the effectiveness of those controls.
The Corporate Governance Code continues to be enforced on a "Comply or Explain" basis, which aims to ensure that governance expectations are tailored to each company. "Frankly, a good explanation illustrates better governance more than a situation where a Board defaults to compliance with a specific Code provision that manifestly doesn't suit its circumstances but where the Board lacks the confidence to make the explanation," Moriarty added.
In the UK and elsewhere, legislators and government officials insist that regulators walk a fine line between effective supervision of industry and enforcement of rules on the one hand, and promoting economic growth and national competitiveness on the other. While often posed as competing aims, they need not be so. In a soon to be released Deeper Dive, "Physician, Heal Thyself," we will explore how oversight can be made more effective by reducing burdensome and unproductive regulatory requirements in favor of new approaches that may also serve economic competitiveness priorities.