The 2018 Corporate Governance Code (the Code) was updated in January 2024 following a consultation which concentrated on a limited number of changes. The 2024 Code will apply to financial years beginning on or after 1 January 2025. The 2018 Code remains in place until this time.
Changes to the FCA Listing Rules
In July 2024, the Financial Conduct Authority (FCA) updated its Listing Rules, including the categories under which securities are listed on the Official List. As a result, there was a change in the companies required to follow the UK Corporate Governance Code. Previously, the Code applied to premium-listed companies. Going forward, companies which need to follow the Code include all those listed in the commercial companies category or the closed-ended investment funds category. For further information, please see the FCA consultation response.
The 2024 Code will apply to financial years beginning on or after 1 January 2025, other than Provision 29 which will apply to financial years beginning on or after 1 January 2026. Please refer to the 2018 Code below for the reporting periods prior.
This version of the Code contains intext links to the updated guidance.
The 2024 Code is separated into five sections: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration, and it operates on a ‘comply or explain’ basis. This edition of the Code includes a small number of changes from the 2018 Code. Provision 29 now asks boards to make a declaration in relation to the effectiveness of their material internal controls. A new Principle has been included to encourage companies to report on outcomes and activities. A number of provisions have been removed related to Audit Committees as these provisions are now within the Audit Committees and the External Audit: Minimum Standard.
Following the government consultation on Restoring Trust in Audit and Corporate Governance, in 2022, the government invited the FRC to strengthen the UK Corporate Governance Code in specific areas.
The consultation lasted 16 weeks. Consultation responses and the full consultation paper can be found on the Corporate Governance Code Consultation page.
The Code is applicable companies listed in the commercial companies category or the closed-ended investment funds category, regardless of where they are incorporated. To comply with elements of the UK Listing Rules these companies must apply the Principles of the Code and comply with, or explain against the Provisions.
Corporate Governance is not only important for the largest companies, all companies should have appropriate systems, policies and practices in place, therefore many companies that are not required to follow the UK Corporate Code choose to do so.
While the UK Corporate Governance Code does not apply to private companies, large private companies that are in scope of The Companies (Miscellaneous Reporting) Regulations 2018 are required to disclose their corporate governance arrangements. The Wates Principles provide a framework for these companies to fulfil this requirement.
The Code applies from the date when a company becomes listed in the commercial companies category or in the closed-ended investment funds category. Prior to listing companies should consider the Code requirements and where possible prepare in advance. Companies must disclose any areas of non-compliance and explain reasons for and offer a timeframe when the company will be compliant with the Code.
The 2024 Corporate Governance Code will apply to financial years beginning on or after 1 January 2025. However, Provision 29 will apply to financial years beginning on or after 1 January 2026.
The Code operates on a ‘Comply or Explain’ basis. recognising that one approach does not necessarily suit all companies. It takes into account that an alternative to complying with a Provision may be beneficial or necessary for the company in particular circumstances based on a range of factors, including the size, complexity, geography, and ownership structure of a company.
The ‘Comply or Explain’ regime offers flexibility, and it encourages companies to choose bespoke governance arrangements most suitable to their particular circumstances in both the short and long-term. When departing from the Code companies should explain how their chosen alternative arrangement is more appropriate and beneficial in upholding high standards of governance.
Carefully considered corporate governance policies and practices along with high levels of transparency can lead to improved levels of trust. This will allow investors and other stakeholders to take a more measured view of the governance and reporting of the company.
Improving the quality of ‘comply or explain’ reportingThe FRC issues guidance and other publications to assist boards and board committees in considering how to apply the Code to their particular circumstances. These publications cover: The Guidance on Board Effectiveness; The Guidance on Audit Committees; and The Guidance on Risk Management, Internal Controls and Related Financial Business.
The 2024 Code Guidance combines the three documents above and is hyperlinked via the 2024 code. The 2024 Code is effective from 1 January 2025 (other than Provision 29) The 2024 guidance supports this Code.
Since the publication of the revised Code in 2018, the FRC have been monitoring reporting against the Code by selecting a random sample of 100 FTSE350 and Small Cap companies, and assessing the quality of reporting. Assessments cover reporting against both the Principles and Provisions, but the emphasis may change year on year.
The 2023 Review of Corporate Governance Reporting (the 2023 Report) considered the following areas: Audit, Risk and Internal Controls; Code Compliance; Culture, Purpose and Values; Diversity; Environment; Board Evaluation; Remuneration; and Shareholder and other Stakeholders Engagement. Some of the key findings include:
The publication of the Government Response to the consultation on strengthening the UK’s Corporate Governance, Corporate Reporting and Audit systems sets out the Government’s policy positions responding to the three independent reviews on the audit product (Brydon Review), statutory audit services market (Competition and Markets Authority Review), and the Regulation of that market (Kingman Review). The Government Response sets out the reforms the Government proposes to legislate for and covers the respective responsibilities of directors and their responsibilities for governance, internal control, and corporate reporting; preparers of financial and non-financial information (usually professional accountants); auditors and providers of assurance services, and actuaries.
For more details please see the FRC’s Position Paper issued in July 2022.
The FRC has released new Guidance to support the 2024 Code which is available below. The purpose of this guidance is to support those who use the 2024 Code by providing advice, further detail and examples. The guidance is not intended to be prescriptive.
The guidance above combines the three previous guidance documents which supported the 2018 Code. These remain available below for those who wish to consult them.
The Guidance on Board Effectiveness (the Guidance) was published in 2018. The purpose of the Guidance is to support reporting against the Principles and Provisions set out in the Code in a non-prescriptive way. It encourages consideration of how boards carry out their role and improve their effectiveness and contains suggestions of good practice to support directors and their advisors in applying the Code.
We would advise those preparing their governance reports and statement to refer to this guidance.
The FRC Guidance on Audit Committees was first published in 2003 and most recently updated in April 2016. It is intended to assist company boards when implementing Section 4 of the UK Corporate Governance Code dealing with audit committees, and to assist directors serving on audit committees in carrying out their role.
To assist audit committees looking to put their external audit out to tender the FRC has provided in 2017 a Best Practice guide to Audit Tendering.
This guidance - Risk Management, Internal Control and Related Financial and Business Reporting - sets out board responsibilities for establishing, monitoring and reviewing the risk management and internal control systems. It also provides guidance on how to report principal risks, the going concern basis, the viability statement and the review of risk management and internal control systems.
Following the proposals on the Government’s Response to the Consultation to strengthen the reporting requirements on internal control systems, the FRC will work with stakeholders to develop new appropriate guidance.
In July 2022, the FRC published company meetings guidance in the form of principles and actions that listed companies should consider adopting in order to enhance effective shareholder participation when planning and conducting AGMs and other general meetings. The guidance draws on the work of the FRCs AGM Working Group. Key aspects include board engagement with shareholders, communication of meeting arrangements, using proxies, and voting processes.
In October 2020 the FRC issued a best practice review of Annual General Meetings. The report considers how companies can embrace new technologies which became more prevalent following the Covid 19 pandemic. It highlights the importance of engagement with all shareholders and considers ways to mitigate the risk of disenfranchisement of retail shareholders.
The FCA’s Listing Rules and the Companies Act already require in-scope companies to provide climate-related financial disclosures. In addition, HM Treasury has launched the Transition Plan Taskforce Disclosure Framework and work is ongoing to introduce UK Sustainability Disclosure Standards for companies on the sustainability-related risks and opportunities, based on the International Financial Reporting Standards S1 and S2.
The Code already asks companies to consider long-term sustainability, therefore proceeding with our original proposal risked duplication.
The purpose of the outcomes-based reporting is to move away from boilerplate disclosures. We recognise that not all board decisions have an immediate or observable outcome, and that some outcomes may be commercially sensitive. Reporting should take account of this.
These changes have always been central to our proposals and align with the Government’s desire to strengthen reporting in this area. We have sought to implement the changes in a proportionate way.
Explanations are key to the ‘comply or explain’ nature of the Code, something which is emphasised by the inclusion of new Principle C in the 2024 Code. While a departure from the Code could achieve effective corporate governance, an explanation is necessary for effective transparency.
Companies should provide full and meaningful explanations so that shareholders and other stakeholders understand why a departure is necessary and how it achieves effective governance for the company even though is a departure from the Code. It is an opportunity to communicate and demonstrate confidence that the company is taking governance and reporting seriously.
A meaningful explanation should set out the background, provide a clear rationale for the action the company is taking, describe any risks and mitigating actions to address them, and set out when the company intends to comply (timescales). Most importantly, it must be understandable and persuasive for those reading the annual report.
It should give enough detail so that investors and other stakeholders can understand and evaluate why the company has departed from a Provision, and what the chosen alternative entails.
Additional information on what constitutes a good explanation is included in the FRC's paper Improving the Quality of 'Comply or Explain' Reporting published in February 2021.
The Code recognises that there is no single path to achieving effective corporate governance for all companies and therefore a single approach does not suit all companies. Companies can choose to depart from the Code, in which case they should provide an explanation for this non-compliance.
Companies should provide a statement in their annual report showing whether they: a) fully complied with all elements of the Provisions of the Code throughout the whole financial year; or b) has departed from any of the Provisions of the Code (whether throughout the whole financial year or part of it), citing any Provisions that they have not complied with and state where in the report the explanation can be found.
The Code is not a rulebook – it sets out good practice, made up of flexible requirements. Where a company has explained non-compliance with a Provision, investors should determine whether this explanation is satisfactory and demonstrates how departure from the Code benefits the company. Where explanations are weak, investors should engage with companies and hold directors to account in order to improve governance practices and reporting.
A meaningful explanation should set out the background, provide a clear rationale for the action the company is taking, describe any risks and mitigating actions to address them, and set out when the company intends to comply (timescales). Most importantly, it must be understandable and persuasive for those reading the annual report.
A meaningful explanation should set out the background, provide a clear rationale for the action the company is taking, describe any risks and mitigating actions to address them, and set out when the company intends to comply (timescales). Most importantly, it must be understandable and persuasive for those reading the annual report.
Provision 4 applies to all resolutions at general meetings, whether proposed by the board or shareholders. The ‘board recommendation’ reference is to how the board recommended shareholders vote on a resolution, i.e. a vote “for” a board resolution, or a vote “for” or “against” a shareholder resolution.
The term ‘workforce’ is broader than ‘employees’, as used in Section 172, i.e. those with a direct contract of employment with the company. Instead it might include agency workers, contractors and people with ‘zero hours’ contracts. This will depend of course on the particular circumstances of the company which should decide who is included within the definition and explain why it has reached its conclusions. We explain this further in Paragraph 50 of the Guidance (PDF), but this is not a legally defined term. [For the Remuneration section please see Paragraph 131 for a description of workforce in this context.]
No – the Code is ‘comply or explain’. There may be reasons to keep a chair in post, but boards must think very carefully about their composition, refreshment and succession planning, and offer an explanation.
The independence criteria in Provision 10 have and will continue to act as a recommended tenure period for non-executive directors. The new period for chairs ensures that there is careful consideration after 9 years. Where there is an extension this should be supported by comprehensive explanations which will help investors and other stakeholders better understand the long-term succession planning strategy of companies.
In respect of board chairs, the recommended nine-year tenure period starts when the person first joins the board. Nevertheless, the 2024 Code offers flexibility on this issue. Principle K refers to the combination of skills, experience and knowledge needed on a successful board and that consideration should be given to the overall length of service of the board. This recognises that an effective board will benefit from a mix of lengths of service.
In addition, Provision 19 says that the nine-year period “can be extended for a limited time, particularly in those cases where the chair was an existing non-executive director on appointment”. The provision explains that this is “to facilitate effective succession planning and the development of a diverse board”.
The Code is of course based on setting a high standard of good practice and the principle of ‘comply or explain’ and we expect high quality explanations in cases where companies depart from the Code Provisions.
In terms of Code reporting, we would not expect companies to list all their senior management by name. Nevertheless, good practice would be to indicate the size and scope of senior management, for example – an Exco/Executive Board of XX (with XX direct reports – for the purposes Hampton Alexander reporting). This could be done by use of a footnote.
The definition of ‘senior manager’ in s414c (see below) is based more on function rather than seniority, so some companies may have different disclosures under the legislation than for the Code. Where this is the case companies can explain why the two disclosures are different, but some may wish to use the definition which covers both requirements.
(8) In the case of a quoted company the strategic report must include—
a. a description of the company’s strategy,
b. a description of the company’s business model,
c. a breakdown showing at the end of the financial year—
(i) the number of persons of each sex who were directors of the company;
(ii) the number of persons of each sex who were senior managers of the company (other than persons falling within sub-paragraph (i)); and
(iii) the number of persons of each sex who were employees of the company.
(9) In subsection (8), “senior manager” means a person who—
a. has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and
b. is an employee of the company.
No. Directors will not have to make a declaration over all internal controls, they will only have to make a declaration of effectiveness over those controls deemed to be material.
What is a ‘material control’ is for each individual board to determine. ‘Material controls’ will be company-specific and therefore different for every company depending on their features and circumstances, including for example size, business model, strategy, operations, structure and complexity.
Compliance, operational and reporting controls refer to the internal controls in place over the compliance, operational and reporting aspects of the business. These will be specific to business needs, sectors, jurisdiction, size and complexity of each company.
Provision 29 of the 2018 Code already required that boards monitor, review and report on financial, operational and controls. The 2024 Code asks that the board make a declaration of effectiveness over these controls and extends these controls to include those over reporting, such as narrative and ESG reporting controls.
The board should make its own assessment as to the effectiveness of the material controls using evidence it has obtained through the monitoring and review of the risk and internal control framework. When making this declaration, the board may wish to specifically consider any failings, near misses or weaknesses of the material controls and whether these controls are effective at mitigating or managing the underlying risks.
Provision 29 of the Code requires that the board should monitor the company’s risk management and internal controls framework and carry out a review of its effectiveness, at least annually. An effective risk management and internal controls framework will include monitoring and review components, and as such, it is possible for information collected internally to be relied upon for the purposes of reporting and making any declaration. It is for individual boards to decide whether external assurance is required over controls, and to what degree.
There is no change to the scope of work for the external auditors. The reporting on risk management and internal controls constitutes other information for the purposes of an audit and the auditor’s responsibilities for other information are set out in ISA (UK) 720 (Revised November 2019).
The 2024 Code and accompanying guidance does not set out a template risk and internal controls framework. Risk and internal controls frameworks will be unique to each company, taking into account a range of factors including size, complexity and maturity. The board may wish to use an established standard or framework as part of designing and maintaining the effectiveness of the risk management and internal control framework. Many companies already use established frameworks (or bespoke frameworks) to report on their internal controls in other jurisdictions
Both the Code and the Strategic Report asks directors to consider the situation of the company and identify its emerging and principal risks (and their materiality to shareholders), and how they are managed and mitigated.
For many companies cyber/IT security will be amongst these risks, but the Code does not provide a list of risks for directors to consider as this is a matter for their judgement and particular to the company’s activities. Of course, having expertise on the board in this area will be one way of mitigating this type of risk.
The purpose of the Code disclosures is to give investors an understanding of the directors' consideration of risks and the actions that have taken. Investors can then engage with the company as appropriate.
The 2024 Code Guidance does consider cyber risk.
This was purely an update of wording and the intention is that this would be half- yearly statements.
The intention of Provision 36 is to encourage a phased approach so that not all shares vest at the same time. Phased awards should encourage a continuous focus on performance over the long-term. This sets out well-established market practice, enforced by clear and robust institutional investor expectations. Provision 36 is intended simply to indicate that LTIP award shares should be granted on a phased basis and should vest in grant order.
We are aware that director incentives are typically not included in director service contracts and are in most cases, generally included in separate agreements. Provision 37 takes this into account and states:
“Directors’ contracts and/or other agreements or documents which cover director remuneration should include malus and clawback provisions that would enable the company to recover and/or withhold sums or share awards. ”
The words ‘and/or’ has been included to allow organisations to choose their preferred way. We are not requesting for service contracts to be revised to add in malus and clawback provisions.
Currently companies are required to present a new/revised policy for shareholder approval at least every three years, under section 439A of the Companies Act. It may be omitted from the directors' remuneration report for a particular financial year in which the company does not intend to move a resolution to approve the directors' remuneration policy, provided certain information is included in the directors' remuneration report. We have introduced this provision to a consistent approach going forward and to provide greater transparency around these provisions.
Disclosures under Provision 38 should focus on executive directors and not all those that are subject to malus and clawback.