Following a 16-week consultation into changes to the UK Corporate Governance Code, the Financial Reporting Council (FRC) published the 2024 UK Corporate Governance Code on the 22 January 2024.

The FRC has kept changes to the Code minimal, focusing on those that are necessary to promote smarter regulation. The FRC was conscious that the expectations for effective governance should be targeted and proportionate. Through this, the FRC is looking to balance establishing trust and confidence in UK plc for investors whilst keeping the burden on businesses to the minimum necessary.

The FRC has prioritised revisions to the Code in one significant area: Internal Controls. As signalled in November, the FRC dropped proposals for revisions to the Code related to the role of audit committees on environmental, social and governance issues like expanding diversity and inclusion expectations; over-boarding provisions, and expectations on Committee Chairs’ engagement with shareholders.

In relation to Internal Controls, the existing expectations in the Code will remain. Namely that the Board should monitor the company’s risk management and internal control framework and, at least annually, carry out a review of its effectiveness.

The existing Code also includes the provision that monitoring and review should cover all material controls, including financial, operational, reporting and compliance controls. The main substantive change the FRC is now making asks Boards to explain through a declaration in their Annual Reports how they have done this and their conclusions. This will require companies to formalise their documentation and reporting processes.

This will mean a Board must determine its material internal controls to determine what level of maturity is right for its business and the effectiveness of these controls.

In response to stakeholder feedback that Boards need more time to develop their approaches to Internal Controls, it has been announced that this Board declaration will come into effect from 1 January 2026 — one year after the rest of the updated Code comes into effect from 1 January 2025.

The FRC considers this approach to Internal Controls, which is principles based and relies on Boards making their own judgments on what is material, to be better suited for the UK commercial and governance framework than a more intrusive and prescriptive approach required in other jurisdictions.

Whilst the well-established principle of Boards having the flexibility to “Comply or Explain” will remain, these changes will, for many companies, require significant work. Impacted organisations will have to refine and document the Internal Controls that are in place, as well as establish an efficient mechanism to report on the Controls working effectively.

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