It is what was missing from the King’s Speech that is getting our attention today. Specifically, the lack of any reference to audit and corporate governance reform. It is now clear that the Government’s intended primary legislation to create the Audit, Reporting and Governance Authority is not being prioritised in the next Parliamentary session.
This will not have come as a surprise to those who are closely following governance developments. Only last month, the Government withdrew the draft Companies (Strategic Report and Directors’ Report) (Amendment) Regulations, days before they were due to be considered by Parliament. The Government said that the U-turn was because consultation with companies raised serious concerns about the negative impact of additional reporting requirements, with the backdrop being that the Government wanted to “reduce the burden of red tape to ensure the UK is one of the best places in the world to do business”.
Immediately following the King’s Speech, the FRC released a statement on the impact of the Government’s decisions outlined above on the FRC itself, and also on the recently completed Corporate Governance Code consultation. The FRC notes that the ‘right balance at the current time is to take forward only a small number of the original 18 proposals’, this decision having been made based on the full range of feedback received and the FRC’s objectives to enhance trust and confidence in governance whilst supporting UK economic growth and competitiveness.
The FRC’s statement says that there will be a small number of changes to streamline and reduce duplication in the Code, which may be welcome news to those whose feedback included that duplication was a problem, particularly inconsistencies with the Listing Rules. The FRC also says that it will not take forward over half of the original proposals, which include “those relating to the role of audit committees on environmental and social governance and modifications to existing code provisions around diversity, over-boarding, and Committee Chairs engaging with shareholders”.
The main substantive change which the FRC has said it will take forward relates to internal controls. Whilst the statement is not explicit that this relates to the board declaration as to the effectiveness of the company’s risk management and internal control systems, it is clear that this is what the FRC is referring to as they say that they will “allow more time for implementation and ensuring the UK approach clearly differentiates from the much more intrusive approach adopted in the US”. The FRC notes that this decision was informed by “very helpful stakeholder feedback to ensure we end up with a more targeted and proportionate Code revision”. We hope that this means that the drafting of new Provision 30 can be improved to ensure that the declaration is given as at the balance sheet date (and not continuously throughout the reporting period and up to the date of the annual report) and that the definition of “controls” is tightened so as to ensure that the declaration relates to financial controls only.
It is helpful that the FRC is giving companies a steer that the updated Code will be much closer to the current Code than was originally proposed. However, the FRC’s statement is light on detail as to what will be omitted, and it remains to be seen whether the changes which are ultimately included in the updated Code reduce the expected reporting burden for premium listed companies.
The FRC has said that the updated Code will be published in January 2024, and we expect that it will be effective for financial years commencing 1 January 2025, as was set out in the consultation.