This UK corporate governance update covers the period from June to October 2024. Please click on the relevant headings below to read more information on each of the topics or click here for a printable copy.
Audit and corporate governance reform
The King's Speech on 17 July 2024 confirmed the new Government's intention to publish a draft Audit Reform and Corporate Governance Bill (Bill) to strengthen audit and corporate governance in the UK. Changes to the audit, corporate reporting and corporate governance regimes had been proposed by the previous Government following a series of high profile collapses of large corporates. However, work on these changes had been halted following concerns about the increasing reporting burden facing companies. We assume that the changes to be introduced by the draft Bill will be based largely on the proposals included in the previous Government's white paper. For example, it has been confirmed that the draft bill will replace the Financial Reporting Council (FRC) with a new regulator, the Audit Reporting and Governance Authority which will have a wider range of powers to tackle poor corporate reporting (as per the previous government's proposals). You can read our summary of the proposals included in the white paper here. No indication of timing was given in the Speech or the background briefing notes but press commentary suggests that it is not expected to be passed into law in the first 12 months of the new Government.
FRC’s Annual Review of Corporate Reporting
In September 2024, the FRC published its annual review of corporate reporting. Its remit covers the annual report and accounts and interim reports of listed companies and the annual reports and accounts of UK-incorporated public companies, large private companies, and limited liability partnerships. The report sets out the findings from the FRC's review work in relation to the 2023/2024 monitoring cycle and the FRC's expectations for the next reporting cycle. Key points include:
the quality of corporate reporting by FTSE 350 companies has been maintained, however, the FRC notes some evidence of a widening gap in reporting quality between companies within the FTSE 350 and other companies
TCFD reporting has moved into the FRC's top 10 issues for the first time, with lack of clarity around statements of consistency with the framework being the most common issue identified. More concise disclosure was needed and companies are reminded that material information should not be obscured
reminding companies to take a step back to consider whether the annual report and accounts, taken as a whole, tells a consistent and coherent story. Companies are encouraged to provide material disclosures that are clear, concise and company-specific
although the number of queries in relation to the strategic report and other Companies Act 2006 matters decreased, the FRC continues to raise issues in relation to the requirement for the strategic report to be fair, balanced and comprehensive and compliance with distributable profits requirements when paying dividends and repurchasing shares.
Key expectations for 2024/2025 annual reports and accounts include ensuring that:
the company has a sufficiently robust review process to identify common technical compliance issues
clear and consistent disclosures about uncertainty and risk
the strategic report includes a fair, balanced and comprehensive review of the company's development, position, performance and future prospects.
Companies are reminded to take a step back and consider whether the report and accounts as a whole:
tells a consistent and coherent story
is clear, concise and understandable
includes all material and relevant information
includes only material and relevant information.
In relation to TCFD and climate-related narrative reporting, the FRC notes that over the next year it will be reviewing the extent of compliance with the new 2006 Act climate-related financial disclosure (CFD) requirements. It reminds companies that CFD disclosures are mandatory and are not given on a comply or explain basis unlike the TCFD disclosures required for certain listed companies by the UK Listing Rules. The FRC will be publishing a thematic review on CFD reporting in winter 2024/2025. As part of the review, the FRC will be looking at the CFD reporting in the annual reports of a selection of large private and AIM companies that are within scope and have year ends between August and December 2023.
FCA consultation on enhancing the national storage mechanism
The Financial Conduct Authority (FCA) has published CP24/17 on enhancing the national storage mechanism (NSM). The NSM is the online archive on information published by listed companies which is maintained by the FCA. The consultation proposes to change data requirements for “regulated information” (information disclosed by companies on a regulated market in accordance with the Disclosure Guidance and Transparency rules, UK Listing Rules and Articles 17 to 19 of the UK Market Abuse Regulation) and to standardise the way primary market information providers (PIPs) submit information to the NSM. The aim of the changes is to improve the functionality of the NSM so that it is easier for users to find regulated information. The FCA plans to significantly improve the NSM so that it can support the modernisation and future development of the UK capital markets.
The proposals will mainly affect PIPs but will also affect those notifying filings as the FCA proposes a number of specific changes, including that the requirement to notify a legal identifier number is extended to the person required to file the regulated information (if different to the company concerned). The requirement to obtain an LEI may be new for some entities and will need to be considered in advance if the changes are adopted as proposed.
The consultation closed on 27 September 2024.
New Investment Association Principles of Remuneration
The Investment Association (IA) has published new remuneration principles (Principles) which set out IA member views on executive pay for listed companies. The Principles emphasise that IA members want a competitive UK listing environment that attracts companies to list and operate in the UK and that IA members review remuneration proposals on a case by case basis. The IA reiterates that the Principles are guidelines, not rules. The Principles have been substantially rewritten since the previous version (November 2022) with the reframing of the initial two principles as “Overarching Principles” and the addition of a third overarching principle stating that remuneration policies should seek to deliver remuneration levels which are clearly linked to company performance. There is also a new introduction to the guidance section which sets out how the Principles should be applied.
FRC second review of reporting against the Wates Principles
In August 2024, the FRC published its second review assessing how companies are reporting against the Wates Principles. The report is based on an assessment of disclosures made in 2021/22 by those companies who applied the Wates Principles.
By way of background, the Wates Principles were developed as a tool for private companies that are required to disclose their corporate governance arrangements under the Companies (Miscellaneous report) Regulations 2018 (Regulations) (being private companies with: (i) more than 2,000 employees; and/or (ii) a turnover of more than £200 million and a balance sheet of more than £2 billion).
Key findings of the report include:
of the 1,815 companies in scope of the Regulations, 1,250 (69%) disclosed information about their corporate governance arrangements with 547 of those companies adopting the Wates Principles
there was a slight improvement in most disclosures scores and the quality of the disclosures made by companies against the six Wates Principles
many companies provide generic corporate governance statements about their corporate governance arrangements rather than focusing on information which is specific to their strategy and business model
there is a need for companies reduce their use of boilerplate disclosures and move towards an approach with links a company's purpose, strategy, culture and values to its board's activities
a recommendation that companies adopt a more "outcomes based" reporting style with greater use of context relevant and time specific disclosures.
The FRC hopes that companies use the report to improve reporting and demonstrate good practice going forwards.
PERG and BVCA consult on changes to the Walker Guidelines
The British Private Equity and Venture Capital Association (BVCA) and the Private Equity Reporting Group (PERG) have launched a consultation to refresh the Walker Guidelines for transparency and disclosure in private equity.
The Walker Guidelines were created in 2007 to increase public understanding of the performance and activities of large private equity backed businesses. The review is intended to ensure the original objectives of the Walker Guidelines are being achieved and will therefore cover both the scope and specific reporting requirements. The review highlights that the goal is to ensure that the quality of narrative reporting of in scope companies in in line with good practice for FTSE 250 companies.
The review will take in to account the significant changes in reporting requirements in the UK since the Walker Guidelines were introduced and recognises that the amendments to the Guidelines will need to take into account the Government’s commitment to corporate governance and audit reform announced in the King’s Speech on 17 July 2024.
The consultation closed on 30 September 2024. PERG and the BVCA will publish a feedback statement summarising responses to the consultation later this year. The revised Walker Guidelines will be published in January 2025.
Stewardship Code review
In July 2024, the FRC announced significant changes to the UK Stewardship Code, including a formal public consultation on the content of the Code later this year and changes designed to significantly reduce the reporting burden (effective immediately). You can read further detail in our briefing on the announcement.
Payment Practices Reporting
Draft regulations to amend payment practices reporting
As reported in our Corporate Governance Update Summer 2024, the Reporting on Payment Practices and Performance (Amendment ) (No 2) Regulations 2024 (Regulations) were published in May 2024. A revised draft of the Regulations was laid before Parliament on 7 October 2024.
The Regulations are in the same form as the previous draft published in May, except that:
they are expressed as coming into force on 1 March 2025
the new reporting requirements apply in respect of financial years beginning on or after 1 April 2025 (rather than 1 January 2025).
Updated Guidance
In September 2024, the Department of Business and Transport published updated guidance on reporting on payment practices and performance. Changes to the previous guidance include:
update to the meaning of "balance sheet total" used in determining whether a company or LLP is in scope of the reporting requirements
expansion of the guidance to refer to the additional reporting requirements introduced by the Regulations.
Further measures to deal with late payments
The Government has also announced a New Fair Payment Code and plans to consult in the coming months on further policy measures to help address poor payment practices. The New Fair Payment Code (which replaces the old Prompt Payment Code) will be open to signatories this autumn.
Institute of Directors draft code of conduct for directors
The Institute of Directors has published a draft code of conduct for directors. The code is structured around the following six key principles:
Leading by example: Demonstrating exemplary standards of behaviour in personal conduct and decision-making.
Integrity: Acting with honesty, adhering to strong ethical values, and doing the right thing.
Transparency: Communicating, acting and making decisions openly, honestly and clearly.
Accountability: Taking personal responsibility for actions and their consequences.
Fairness: Treating people equitably, without discrimination or bias.
Responsible business: Integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.
Each principle is underpinned by a number of undertakings and a list of anticipated outcomes. It is intended to be voluntary and is not meant to be a new compliance burden. The consultation asked a number of questions including whether directors should make a public declaration of their adoption of the Code and whether there is a role for regulators and professional bodies in encouraging adoption of the Code.
The consultation closed on 16 August 2024.
