Major Update on FRC Policy and Reset on Corporate Governance Reforms Plus CMIT Open Letter, With More to Come

On 7 November 2023, the Financial Reporting Council (FRC) announced a significant and wide-ranging policy update which included a material change of direction in relation to how it will approach its work in the future and a significant recalibration of how it will take forward its consultation on proposed changes to the UK Corporate Governance Code.

In summary:

• The FRC will no longer implement nearly all of its proposals set out in its Corporate Governance Code consultation from early summer, the only material exception being in relation to internal controls, which themselves will now only be required at year-end and not constitute ongoing reporting obligations. The FRC intends to publish the new Code in January 2024.
• All guidance associated with the Code will be reviewed via a revamped Stakeholder Insight Group (a panel body representing a range of stakeholders, including preparers and investors) and feedback directly assessed by the new FRC CEO, Richard Moriarty.
• A root and branch review of the Stewardship Code will take place in the new year.
• As outlined in the Chancellor’s Autumn Statement, the government has written to the FRC to update its remit, emphasising the role the FRC should play in promoting UK economic growth and its international competitiveness when carrying out its work. The embedded economic growth duty that the FRC already has will also be brought to the fore.

In addition, the Capital Markets Industry Taskforce’s (CMIT’s) work to reset the relationship between issuers and investors was welcomed by the government in the Autumn Statement. Alongside the Autumn Statement, CMIT published an open letter called “Resetting the UK’s approach to corporate governance” with support from signatories from across listed corporates and asset managers, outlining proposals to take the governance and stewardship reform discussion forward in the coming weeks and months. There will be more to come on that. The intention is that this will be done partly through a new “investor and issuer forum”, expanding the remit of the current Investor Forum. This forum would bring together industry leaders from the boards of listed companies and the investment community to identify key challenges and issues, and enable them to jointly develop practical solutions and actively shape the UK capital markets.

For further details, please see this Latham blog post.

FRC Annual Corporate Governance Review Identifies Areas of Shortcomings

On 16 November 2023, the FRC published its latest Annual Review of Corporate Governance Reporting which surveys the reporting of 100 premium listed companies. The review finds ongoing improvements in the quality of reporting against the Code, but also identifies areas where companies are falling short.

• Comply/explain — The FRC continues to see more transparent reporting of departures from the Code, rather than simply stating compliance (with over 50% of companies departing from one or more provisions of the Code). However, the FRC states that explanations were often found to lack sufficient clarity and few companies reported to a consistently high standard.
• Risk assessment and internal controls — Although the FRC continues to look closely at disclosures around risk assessment and internal controls, it reports that little improvement was seen in the quality of reporting in these areas. More work is needed by most companies to demonstrate robust systems, governance, and oversight.
• Workforce and stakeholder engagement — The FRC was encouraged by the increased focus on workforce engagement and stakeholder reporting. It would now like companies to show how engagement has led to high-quality outcomes by better reflecting on the feedback received and its impact on board decisions.
• Cyber security and artificial intelligence — Given the recent groundbreaking developments in this space, the FRC encouraged boards to consider the potential of AI as well as risks, and that reports should disclose how boards were notified or had oversight of the use of AI within the company. The FRC also encouraged companies to outline the risks, opportunities, and medium- to long-term importance of cyber security to their business and market.

New QCA Corporate Governance Code Provides More Detailed Guidance and Disclosure Expectations

On 13 November 2023, the Quoted Companies Alliance (QCA) released an updated version of its Corporate Governance Code, a set of governance principles designed for growth companies (primarily companies admitted to AIM). The updates increase disclosure expectations and guidance in a number of areas, including the following:

• Introduction of a new principle requiring the establishment of a remuneration policy that supports long-term value creation and the company’s purpose, strategy, and culture. The QCA’s Remuneration Committee Guide provides further guidance around different remuneration structures
• Greater emphasis on corporate purpose, and reporting on diversity, environmental, and social impacts
• Extension of the principle on risk management to include additional guidance and disclosure expectations on internal controls and assurance
• More detailed guidelines on board independence and the role of the Non-Executive Director

The new QCA Code will apply to accounting periods commencing on or after 1 April 2024. A transition period of 12 months will be in place from 1 April 2024 to allow companies (that choose to apply the QCA Code) to focus on providing explanations on certain areas where there have been changes to the Code.

SEC Postpones Share Repurchase Disclosure Requirements

The SEC recently postponed the compliance date for public companies to comply with the SEC’s new share repurchase disclosure rules, which were intended to come into effect next year for foreign private issuers (such as certain UK companies listed in the US). This means that foreign private issuers may not need to comply with the new share repurchase disclosure rules:

• Quarterly Form F-SR filings, which were scheduled to begin for repurchases made during Q2 2024; and
• Annual narrative disclosure in Form 20-F about the objectives, rationales, and other information relating to repurchase plans

Although the eventual outcome remains uncertain because the postponement arises in the context of ongoing litigation challenging the rule, the share repurchase disclosure rules look increasingly unlikely to take effect.

Former FTSE100 Constituent Censured for Misleading the Market About Its Debt

On 17 November 2023, the FCA censured a former FTSE100 constituent (now in administration) for committing market abuse (market manipulation). The FCA found that the company had published financial statements and announcements which, according to the FCA, contained materially inaccurate information about its debt position.

Although the FCA did not specifically find that each and every member of that company’s board knew, or ought to have known, that the disseminated information was false or misleading, the FCA was satisfied that there was knowledge within the company at a sufficiently senior level that the disseminated information was false or misleading for that knowledge to constitute the knowledge of the company for the purposes of market abuse.

Despite the severity of the conduct, the FCA did not impose a financial penalty given the company is in administration and it being anticipated that no funds will be available after creditor claims are met. The FCA flagged in its press release that it has engaged with law enforcement agencies abroad and will continue to provide any further support they may request to help combat financial crime.

Institute of Directors Launches Commission to Develop a Code of Conduct for Directors

On 25 October 2023, the Institute of Directors (IoD) announced that it has launched a commission, consisting of leading figures from the worlds of business and public affairs, to develop a code of conduct for directors. The IoD’s vision is for board members from all types of companies to sign up to the code of conduct on a voluntary basis, signaling their willingness to apply high ethical and behavioural standards in their governance and leadership activities.

The commission will run between September 2023 and March 2024, and report its findings in April 2024.

New Glass Lewis Proxy Voting Guidelines Reflect Trending Investor Topics

On 17 November 2023, Glass Lewis updated its UK proxy voting guidelines to reflect the trending topics at the top of mind for investors and issuers, including cyber risk, oversight of climate, and other ESG risks, and board diversity and composition.

Key changes relate to overboarding, director accountability for climate-related issues, cyber risk oversight, pensions, and combined incentive plans.