UK Corporate Governance Update Winter 2024

On 26 November 2024, the Financial Reporting Council (FRC) published its annual review of corporate governance reporting, in which it highlighted a number of areas for companies to consider ahead of the upcoming transition to the new 2024 Corporate Governance Code.

Key focuses of the review include a desire (i) for greater outcomes-based disclosures; (ii) to maintain flexibility through the 'comply or explain' approach; and (iii) for more rigorous reporting on risk management and internal controls, particularly in light of the new Provision 29 within the 2024 Code.

Highlights include:

• Compliance with the Code - the FRC maintains that good governance is flexible and does not need to strictly follow the Code. However, the review emphasises the importance of clear and sufficiently detailed explanations where companies depart from provisions. Reports should be transparent about which provisions are not complied with and explain why, providing information about any applicable risk assessments and mitigation undertaken. As a whole, however, departures from the Code had decreased in the year under review

• Culture - companies are increasingly aware of the importance of culture to good governance. however, culture reporting needs to be rigorous and evidence-based, demonstrating how it is promoted and monitored by the board specifically

• Engaging with stakeholders - boards should engage with a variety of different stakeholders, and, crucially, reporting should ideally link this engagement to outcomes and effects on board decision-making processes. Engagement is the responsibility of the board and should not simply be assigned to senior management

• Overboarding - disclosure of the external board commitments of directors should be detailed and avoid generic statements. Specifically, reporting should set out directors' other commitments and the factors used to assess these. Involvement in board committees is a particularly high commitment, which should be monitored and disclosed

• Minimum Standard - The Audit Committees and the External Audit: Minimum Standard is a key focus area for the FRC given its incorporation into the Code for financial years beginning on or after 1 January 2025. It was recommended that audit committees explicitly incorporate the Minimum Standard into their terms of reference to support compliance

• Enhanced risk management reporting - a number of companies reported their preparations for the forthcoming new Provision 29, which will require boards to report on the effectiveness of their material controls, and how they have reviewed this. However, current reporting could generally be improved. Of the 130 companies reviewed in this area, 25 companies either did not disclose whether they conducted such a review, or did so in an unclear manner

On 11 November 2024, the FRC published a long-anticipated consultation on the update of the UK Stewardship Code. This follows interim changes to the Code which were announced earlier this year, as covered in our insights article here. The proposed changes include:

• Amending the definition of stewardship to support more transparent conversations between actors in the investment chain about their investment beliefs and objectives

• Streamlining the reporting process by separating policy and context disclosures from activity and outcome disclosures which is designed to reduce the reporting burden

• Restructuring and refining the principles to offer greater clarity for different entities in the investment chain and to offer more concise prompts on how to report

• Tailoring the service provider principles to include some that are dedicated to proxy advisors and investment consultants respectively

• Issuing guidance to indicate the range of information that signatories may use in reporting to demonstrate how they have applied the principles

You can read our more detailed summary of the consultation here.

On 15 November 2024, Glass Lewis (GL) published its 2025 proxy guidelines for the UK. Key updates include the following:

• Director tenure - given the general market acceptance of a wide range of rationales when extending the tenure of a board chair beyond nine years, GL will now consider the rationale provided on a case by case basis rather than recommending an automatic vote against the re-election of the chair of the nomination committee when the tenure of the board chair exceeds nine years with no timeline for succession
• Gender diversity - GL will generally recommend voting against the re-election of the chair of the nomination committee of a main market listed company that has failed to appoint at least two gender diverse directors and has failed to provide a clear and compelling rationale for the lack of diversity
• Ethnic diversity - GL will generally recommend voting against the re-election of the chair of the nomination committee of a FTSE 350 main market listed company that has failed to appoint at least one director from an ethnic minority background and has failed to provide a clear and compelling rationale for the lack of diversity
• Board oversight of AI - a new section provides that boards of companies that use AI technologies should be aware of and take steps to mitigate any exposure to material risks arising from use or development of AI. Such companies should provide clear disclosure concerning the role of the board in overseeing issues related to AI
• Multi-class share structures - given the recent changes to the UK Listing Rules, GL has added a new section on multi-class share structures. If a multi-class share structure is adopted in connection with an IPO, spin-off or direct listing within the last year, and there is an unlisted class of shares with superior voting rights, GL will vote against the re-election of the chair of the governance committee (or equivalent) or a representative of a major shareholder is up for election unless certain criteria are met, for example a sunset clause of seven years or less
• SPACs - a new section covers specific considerations in relation to special purpose acquisition companies (SPACs) including that where an extension of a business combination deadline is needed, GL will defer to the recommendation of management and support reasonable extension requests.

On 22 November 2024, the Pre-emption Group (PEG) published its second report monitoring the use of the revised statement of principles for the disapplication of pre-emption rights for UK listed companies which was published in November 2022 (2022 statement). The 2022 statement allows listed companies to seek authority to disapply pre-emption rights for up to 20 per cent of issued share capital, split between 10 per cent for general corporate purposes and 10 per cent for an acquisition or a specified capital investment. The report, which covers the period from 1 August 2023 to 31 July 2024, notes the following:

• 67.1 per cent of the 334 FTSE 350 companies that tabled a resolution to disapply pre-emption rights sought an enhanced authority (i.e. one that exceeded the authority permitted under the previous statement of principles published in 2015). This is an increase from 55.7 per cent in the previous year, suggesting that companies are gaining confidence in the 2022 statement

• 64.1 per cent of companies tabling disapplication of pre-emption rights resolutions did so for a specified capital investment

• Nearly all resolutions for disapplication authority were passed with more than 75 per cent shareholder approval, however, levels of shareholder dissent are elevated when compared to other types of resolution tabled in the AGM season and PEG will continue to monitor this. A small minority of investors are still voting against all resolutions seeking enhanced disapplication authorities as they disagree with the 2022 statement.

On 10 December 2024, the Government published the draft Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 (the Regulations). The Regulations increase the financial thresholds that determine company size for the purpose of non-financial reporting requirements under the Companies Act and also remove certain requirements from the directors' report which they consider to be redundant.

The Regulations build on an announcement (and subsequent consultation) from the previous government indicating that they would bring forward legislation to amend the turnover and balance sheet thresholds. The previous proposals were covered in our Summer Corporate Governance Update.

The changes proposed by the Regulations are as follows:

Increased financial thresholds

Company size is determined by reference to whether a company exceeds two out of three maximum thresholds (annual turnover, balance sheet turnover and number of employees). The Regulations propose increasing the annual turnover and balance sheet total by approximately 50% as follows:

Annual turnover (£) (not more than)

• Micro - Old: 632k / New: 1m

• Small - Old: 10.2m / New: 15m

• Medium - Old: 36m / New: 54m

Balance sheet total (£) (not more than)

• Micro - Old: 316k / New: 500k

• Small - Old: 5.1m / New: 7.5m

• Medium - Old: 18m / New: 27m

These proposals are in line with the changes to financial thresholds consulted on by the previous government. However, we note that one point of difference between the previous government's consultation and the Regulations is that no changes are proposed to the number of employees thresholds in the Regulations (whereas the consultation proposed an increase in the threshold for medium sized companies from 250 to 500).

Changes to the directors' report

The Regulations also remove some of the existing requirements for the directors' report which are seen to overlap with other reporting requirements or are of limited value to stakeholders, including:

• use of financial instruments

• important events that have occurred after the end of the company's financial year

• likely future developments

• investment in R&D

• engagement with employees, customers, suppliers and others.

The Regulations come into force for financial years beginning on, or after, 6 April 2025.

TNFD draft guidance on nature transition planning

On 27 October 2024, the Taskforce on Nature-related Financial Disclosures (TNFD) published a discussion paper setting out draft guidance on nature transition planning for corporates and financial institutions developing and disclosing a transition plan. The draft guidance includes:

• Definition of a nature transition plan and guidance on what it should include and how it should be presented and disclosed

• An overview of related initiatives

• Areas of further work needed to support development and assessment of nature transition plans

The draft guidance is open for comments until 1 February 2025.

IFRS Foundation progress report on climate related disclosures

On 12 November 2024, the IFRS Foundation published a detailed progress report setting out global progress towards both mandated and voluntary climate related disclosures. Key findings include:

• 82% of the 3,812 public companies disclosed information in line with at least one of the 11 Task Force on Climate-related Financial Disclosures (TCFD) recommended disclosures and 44% with at least five of the recommended disclosures. Approximately 2-3% of companies reported in line with all 11 TCFD recommended disclosures.

• Companies are beginning to make the transition from disclosures in line with TCFD to disclosures in line with the Standards issued by the International Sustainability Standards Board (ISSB). Between October 2023 and March 2024, more than 1,000 companies referenced the ISSB in their reports.

• As of September 2024, 30 jurisdictions have decided to use or have taken steps to introduce ISSB Standards in their legal and regulatory frameworks.

• Most asset managers and asset owners who responded to survey questions about ISSB Standards want or expect portfolio companies to make the transition from using TCFD aligned disclosures to disclosures prepared using the ISSB Standards.

European Commission (EC) FAQs on sustainability reporting

On 13 November 2024, the EC published a set of FAQsdesigned to clarify the interpretation of certain provisions on sustainability reporting introduced by the Corporate Sustainability Reporting Directive (CSRD). The FAQs include:

• An overview of the sustainability reporting requirements under CSRD and the Accounting Directive

• Guidance on the assurance of sustainability reporting (including ability of third country assurance providers to provide assurance of EU sustainability reporting)

• Questions relating to matters under the Accounting Directive including relevant financial year for determining thresholds, calculating employee numbers, treatment of different type of funds and rules on various exemptions.

• Guidance on Article 8 Taxonomy Regulation disclosures including in respect of third country parent undertakings

• Guidance on the relevant European Sustainability Reporting Standards (ESRS) to report against and questions in respect of the ESRS requirements including matters relating to the concept of a "value chain"

• Guidance relating to administrative matters including digital format and language requirements of sustainability reporting, publication deadlines.

Ministerial statement

On 14 October 2024, the Secretary of State for Business and Trade spoke in the House of Commons and confirmed the following:

• Corporate re-domiciliation - the Government intends to consult on a proposed regime design enabling companies to redomicile in the UK. A report by an independent expert panel has been published

• Reporting requirements - the Government will lay legislation by the end of 2024 to remove redundant reporting requirements and update the monetary thresholds for micro-entities and small and medium sized companies which will mean reduced reporting requirements for those companies. The legislation was laid on 10 December (see above). A consultation will be launched in 2025 aimed at simplifying and modernising the UK's non-financial reporting framework. The Government will also examine proposals to update shareholder communications in line with technology and clarify the law in relation to virtual AGMs

• Secondary Capital Raising Review - the Government will implement the outstanding recommendations of the Secondary Capital Raising Review which will simplify the process for raising share capital.

Economic Corporate Crime and Transparency Act (ECCTA) update

On 16 October 2024, Companies House published the ECCTA Transition Plan. Key points to note from the Transition Plan include:

• There will be around 50 statutory instruments required to implement the reforms, with implementation activity and transitional periods continuing until completion in 2027

• By spring 2025, Companies House should have the systems in place to allow Authorised Corporate Service Providers (ACSPs) to register and to allow individuals to voluntarily verify their identity

• By autumn 2025, identity verification should be made a compulsory part of incorporation of a company for new directors and PSCs and a 12 month transition period will begin for existing directors and PSCs to verify their identity (which will happen as part of the annual confirmation statement filing)

• By spring 2026, identity verification requirements will apply in respect of the filing of documents at Companies House

• By the end of 2026, Companies House should be able to require all limited partnerships to submit more information (to provide greater transparency) and the transition period for individuals who are required to verify their identity should be completed.

You can read further detail on the company law reforms in our detailed briefing.

On 6 November 2024, the Government published its guidance to organisations on the offence of failure to prevent fraud introduced by the ECCTA. You can read more detail on the guidance in our update.

The Institute of Directors published a draft code of conduct for directors in June 2024. The final code was published in October with minimal changes to the version published in June. 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. Compliance with the Code is voluntary and there is no enforcement mechanism.

On 16 October 2024, the House of Lords Modern Slavery Act 2015 Committee (the Committee) published its report "The Modern Slavery Act 2015: becoming world leading again". The report considers a number of areas including whether the Modern Slavery Act (the Act) has fulfilled its aspirations and whether it needs to be updated. The report includes findings in respect of modern slavery statements (which are required to be published annually by in scope organisations under section 54 of the Act):

• Modern slavery statements are inconsistent and the lack of mandated requirements for contents makes it difficult for companies to be held accountable and provides limited transparency

• The Committee recommends that the government should make publication of statements on its modern slavery registry mandatory (at the moment it is voluntary) and set out required topics for the statement including a description of how an organisation has assessed the effectiveness of its actions

• The government should increase awareness by companies about supply chains including standardised and accessible guidance

• The government should create a public dashboard with information including number of statements in total, by sector and from organisations in scope and examples of good and bad reporting

On 3 December 2024, DBT announced the launch of the Fair Payment Code (FPC), a voluntary code designed to tackle late payments, reward good behaviour and ensure that SMEs are paid on time. The code introduces a gold, silver and bronze reward system to reward best payment practices and drive improvements in payment performance. Applications for awards under the FPC are open from September to December each year and will be awarded for two years. The application window for the first awards (2025-2026) is now open.

On 6 December 2024, the FCA announced its Quarterly Consultation Paper 46 (CP 24/26), in which it seeks input on minor changes to the FCA Handbook. Specifically, certain of the proposed changes aim to align provisions of the Handbook with the upcoming 2024 UK Corporate Governance Code, which will become largely effective from 1 January 2025.