Changes to Financial Reporting Council: UK Corporate Governance Code 2024

Changes to Financial Reporting Council: UK Corporate Governance Code 2024

The Financial Reporting Council (FRC) has introduced the newest edition of the UK Corporate Governance Code, demonstrating a substantial move towards enhancing corporate governance practices.

The changes follow from the FRC review of the UK Corporate Governance, Corporate Reporting, and Audit systems in response to three independent reviews on the audit product, statutory audit services market, and the regulation of that market. The Government’s publication of its response outlines proposed legislative reforms, detailing the responsibilities of directors, preparers of financial and non-financial information, auditors, providers of assurance services, and actuaries in accordance with the recommendations of the Brydon Review, Competition and Markets Authority Review and Kingman Review.

Among the notable amendments, Provision 29 mandates boards to declare the efficacy of their material internal controls, emphasizing a commitment to transparency. It urges companies to uncover their outcomes and activities, underscoring the Code’s adaptability to diverse corporate landscapes.

This blog explores the essential aspects of the revised Code, clarifying its fundamental principles. As we explore these changes, it becomes evident that the main goal of the FRC is not to provide a strict checklist but to stimulate thoughtful governance, fostering a culture of accountability, adaptability and improvement.

The Core Changes in the 2024 UK Corporate Governance Code

The 2024 UK Corporate Governance Code revision focuses on internal controls. The FRC has introduced a principles-based approach, emphasizing the board’s responsibility for efficient internal controls. The Code aims to enforce accurate reporting of control deployments, whether the status of the control is effective or ineffective, to promote transparency and improvement.

In essence, the Code is a guide to steering companies toward resilient and transparent governance. The introduced revisions in the Code are strategically created to reallocate responsibilities from individual stakeholders to the collective governance body, emphasizing the pivotal role of the board. This intentional shift signifies a change in the governance landscape, accentuating the board’s overarching responsibility for effective oversight and decision-making.

The “Comply or Explain” Mechanism

Operating on a ‘Comply or Explain’ basis, the Code recognizes the diversity among companies, acknowledging that a one-size-fits-all approach may not be suitable. It takes into consideration various factors such as company size, complexity, geographical presence, and ownership structure. This approach allows companies to evaluate alternatives to compliance, providing flexibility tailored to their unique circumstances.

Embracing the ‘Comply or Explain’ mechanism offers companies the flexibility to choose governance arrangements that best align with their specific needs, both in the short and long term. When deviating from the Code, companies are encouraged to articulate how their chosen alternative not only meets but surpasses the standards, emphasizing the appropriateness and benefits of their decision.

The purpose of the corporate government code is to promote good corporate security practices to front-line risk managers, and then ensure that that is being reported effectively to the board, who can then in turn demonstrate to auditors and partner companies they promote good corporate risk management.

Corporate Governance Code Application

The Code applies to all companies holding a premium listing on the London Stock Exchange, regardless of where they are incorporated. The 2024 Code becomes effective for companies with financial years starting on or after 1 January 2025, with the exception of Provision 29, which applies from 1 January 2026.

For parent companies with a premium listing, the board is responsible for ensuring effective cooperation within the group to discharge governance responsibilities, emphasizing communication of the parent company’s purpose, values, and strategy.

What does this mean for risk management?

The key aspect that corporate security managers should note are:

  • Ensuring that their work process is efficient

Efficiency equals less time spent prioritizing solutions as opposed to getting stuck in a loop of assessment, reporting and then back to the start.

  • Ensuring that risk accountability is kept across the organization

This Code shifts responsibility from the collective to the board. Now it is more important than ever to be able to report on risk effectively. A current standard for a risk manager is being stuck on a spreadsheet for a long time, slowly building a report that will likely be out of date by the time it gets to the board. With STREAM this is instant.

  • Ensuring that best practice is consistent

The worst scenario is having an inconsistency in reporting, and the cause is one person thought differently to the other. What a system like STREAM does is removes that inconsistency and replaces

  • Safety – the core goal of a corporate security manager 

Ensuring your foundational system is functional, capable and effective guarantees that the ongoing process works. Audit History shows you a demonstratable log of everything and anything that is related to risk and compliance. It acts as the safety blanket when something goes wrong, and an enforcer for accountability.

A Deep Dive into the 2024 Code’s Key Sections

The 2024 Code consists of five sections that comprehensively address key aspects of corporate governance.

  • Audit, Risk and Internal Control

These principles emphasize the establishment of formal and transparent policies for the independence and effectiveness of audit functions and maintaining an effective risk management and internal control framework aligned with long-term strategic objectives.

The changes in audit include the establishment of an independent audit committee to oversee financial statement integrity, review risk management and internal control frameworks, and provide detailed descriptions of their work in annual reports, addressing the absence of internal audit functions and management of internal assurance.

The changes in risk management involve mandating the board to conduct thorough assessments of emerging and principal risks, monitor the effectiveness of the company’s risk management framework, and disclose related findings, including declarations of material controls’ effectiveness and actions to improve them, in the annual report.

The changes in internal control entail the establishment of formal policies to ensure audit function independence, provisions for assessing the company’s ability to adopt the going concern basis, and mandates for the board to clarify its assessment of the company’s prospects in the annual report.

Among the other changes are:

  • Board Leadership and Company Purpose

The principles emphasize the importance of effective board leadership in promoting a company’s long-term sustainable success, aligning purpose, values, and strategy.

  • Division of Responsibilities

These principles advocate for effective board leadership by emphasizing the chair’s responsibility for overall effectiveness and objective judgment.

  • Composition, Succession and Evaluation

These principles advocate for a formal and transparent appointment process.

  • Remuneration

These principles stress the need for remuneration policies aligned with company strategy and long-term success.

About Acuity Risk Management

Acuity’s innovative STREAM Integrated Manager SaaS platform facilitates efficient adherence to the Code’s principles, ensuring that companies can effectively achieve, maintain, and demonstrate robust corporate governance practices. With features tailored to support internal controls and risk management, our award-winning platform empowers businesses to navigate the evolving landscape of corporate governance with transparency, adaptability, and excellence.

A SaaS platform like STREAM takes the resource-intensive approach typically used by legacy systems, and automates the heavy lifting, allowing for focus to be put on the result, instead of the process.

Here are a few of the benefits of using STREAM:

  • STREAM records all actions taken on the platform, demonstrating a log of improvement for risks and controls.
  • STREAM’s out-of-the-box reporting features cover all aspects of reports to the board, with a simple click of a button.
  • Audit management within STREAM is simple, and easy to perform. STREAM’s audit features and management capabilities ensure that internal and external audits are performed smoothly.
  • Risk assessments within STREAM are flexible and dynamic, allowing for a qualitative and quantitative approach.
  • STREAM’s control assessments are capable of covering all aspects of compliance to any framework specified, allowing for dynamic coverage of use cases.

For a personalized consultation on implementing the 2024 Corporate Governance Code within your organization, reach out to our experts today for tailored solutions that align with your unique corporate needs and objectives.