The FRC’s future work will be assessed through the lens of the UK’s economic growth and international competitiveness.

By Mark Austin, Chris Horton, James Inness, Anna Ngo, and Johannes Poon

On 7 November 2023, the FRC announced a significant and wide-ranging policy update which included a material change of direction in relation to how it will approach its work in the future and a significant recalibration of how it will take forward its consultation on proposed changes to the UK Corporate Governance Code. That consultation, which ran from 24 May 2023 to 13 September 2023, sought to implement certain proposals in the UK government’s paper, “Restoring trust in audit and corporate governance”. The vast majority of those proposals will no longer be taken forward.

The announcement represents a significant change of course by the FRC. The broader philosophy in which the policy change sits is that going forward, the FRC will ensure that its work supports the UK’s economic growth and its international competitiveness. The embedded economic growth duty that it already has will be brought to the fore. And as part of that approach, the FRC will explicitly support the government’s ambition of making the UK the best place in the world to start, grow, and invest in a business.

In summary, as set out in more detail below, the FRC will no longer implement nearly all of its Corporate Governance Code proposals, the only material exception being in relation to internal controls, which themselves will now only be required at year-end and not constitute ongoing reporting obligations. Secondly, all guidance associated with the Code will be reviewed via a revamped Stakeholder Insight Group (a panel body representing a range of stakeholders, including preparers and investors) and feedback directly assessed by the new CEO, Richard Moriarty. Thirdly, a root and branch review of the stewardship code will take place in the new year. And fourthly, as mentioned above, all of this will be assessed through an economic growth and international competitiveness lens — with a very marked change of tone in how the FRC intends to approach its work going forward.

The Key Points in Detail

1. Substantial paring back of proposed changes to the UK Corporate Governance Code

The FRC announced that, after carefully considering the consultation feedback received, it will take forward only a small number of the original 18 proposals set out in the consultation and stop development of the remainder:

  • The FRC will proceed with its original proposals to increase board accountability and reporting in relation to internal controls. However, presumably to address concerns that it is seeking to introduce a UK Sarbanes-Oxley regime, the FRC will ensure the UK approach “clearly differentiates from the more intrusive approach adopted in the US” and allow more time for its implementation.
  • Other than internal controls and certain changes to streamline/reduce duplication within the UK Corporate Governance Code, the rest of the original proposals will be dropped. These include those relating to the role of audit committees on ESG and modifications to existing provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders.
    The press release did not expressly refer to the original proposals on remuneration, principally to increase reporting on directors’ malus and clawback arrangements, but these also appear to have been dropped.
  • The FRC will also not take forward the proposals intended to align with the additional corporate reporting requirements in the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations, including requirements to comply/explain against an audit and assurance policy, following the withdrawal of those draft regulations on 16 October 2023.

The FRC is expected to publish an updated version of the UK Corporate Governance Code in January 2024.

2. Explicit focus on supporting growth and competitiveness

The FRC announced that it will implement measures to ensure that its current and planned guidance associated with the UK Corporate Governance Code are proportionate, while not weakening effective governance. This will be achieved by giving an additional remit to its Stakeholder Insight Group to provide the FRC with relevant advice from January 2024.

The press release emphasised that the FRC has a role in supporting the UK’s economic growth and its international competitiveness, in addition to enhancing the quality of audit and corporate reporting and governance.

3. UK Stewardship Code to be reviewed

The FRC noted that, during its consultation, concerns were raised by stakeholders about aspects of the UK Stewardship Code. The FRC announced that, once the updated UK Corporate Governance Code is issued in January 2024, it will as its next priority start to engage with stakeholders on how best to undertake a root and branch review of the Stewardship Code.

There will be many more updates to come. Latham & Watkins will continue to monitor and update on relevant developments.