UK Corporate Governance - autumn 2023 update

A number of recent developments emphasise the importance of a proportionate and pragmatic approach to governance and the UK Government’s aim to reduce the burden on listed and larger private companies, particularly as regards corporate governance and reporting requirements.

Two developments clearly show a recognition from Government and the FRC that placing increased burdens on larger companies is not appropriate at this time, particularly bearing in mind the drive both within and without Government to revitalise the UK capital markets:

• Draft reporting SI withdrawn – on 16 October 2023, the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 (Regulations) which had been laid before Parliament in July 2023 were withdrawn. The Regulations would have required companies with at least 750 employees and an annual turnover of at least £750m to include the following in their annual report and accounts – an annual resilience statement, a distributable profits figure, a material fraud statement and an audit and assurance policy statement on a triennial basis with an update in intervening years. The Regulations were withdrawn, despite being recommended by the Government’s response paper “Restoring Trust in audit and corporate governance” published in May 2022, due to concerns raised by companies about the imposition of reporting requirements which would have required additional layers of corporate information in their annual reports. Since the Regulations were laid in July, the Government had received feedback on existing non-financial reporting requirements following a call for evidence published in May. The responses to that call for evidence had shown a desire from businesses and investors to simplify and streamline existing reporting requirements. Instead, the Government stated that it will pursue options to reduce the burden of red tape with the aim of ensuring that the UK is one of the best places in the world to do business. The statement also noted that the Government remained committed to wider audit and corporate govern reform, including establishing a new Audit, Reporting and Governmental Authority (ARGA) to replace the Financial Reporting Council (FRC).

• FRC policy update – the FRC published a statement on 7 November 2023, noting that the King’s Speech to Parliament setting out the legislative agenda for the Government did not include the anticipated legislation modernising UK corporate governance regulation (including the establishment of ARGA). The statement also gave an update on the proposed changes to the UK Corporate Governance Code (UKCGC) explaining that the FRC has decided to take forward only a small number of the proposals. The main change that has been retained is the new requirement around internal controls where the FRC intends to end up with a more targeted and proportionate revision to the UKCGC, allowing more time for implementation and ensuring that the UK approach is clearly differentiated from the more intrusive US approach. An updated UKCGC will be published in January 2024. The FRC notes that its objectives are to enhance trust and confidence in governance while supporting UK economic growth and competitiveness.

The FRC’s response to the feedback it has received to the recent UKCGC consultation is a pragmatic one and it is positive to see that it has taken on board many of the comments made by respondents. We note that some respondents disagreed with the FRC’s assessment that the “comply and explain” regime worked well and it will be interesting to see if there are any developments on this particular issue as well as the new requirement on internal controls. The FRC update also stated their next priority will be to review the Stewardship Code, the UK code aimed at asset managers and investors.

The Quoted Companies Alliance (QCA) has also published a new edition of its corporate governance code (the “QCA Code”). The new QCA Code reflects latest good practice and places greater emphasis on corporate purpose, environmental and social issues, risk management, board structure and communications. It is recommended that companies apply the new Code for accounting periods beginning on or after 1 April 2024.

Simmons and Simmons were members of the QCA working party which assisted with the redrafting of the QCA Code and were also involved in various groups who commented on the proposed UKCGC.