UK directors to face new governance rules but FRC waters down proposals
The Financial Reporting Council (FRC) has revealed a new set of governance rules for company directors, which are less stringent than initially proposed.
This move is aimed at maintaining UK competitiveness. The most significant change requires directors to annually confirm the effectiveness of their companies' internal controls. FRC chief executive Richard Moriarty explained that the decision was partly due to the need to balance "supporting UK economic growth and competitiveness" with increasing trust in governance.
The battle is on over the UK's company rules. Some people want better rules after big companies like Carillion and Patisserie Valerie failed, but others worry that too many rules will make the UK less successful. On Monday, Mr Moriarty said: "A global reputation for high standards of corporate governance is a competitive advantage for UK plc and our revised code helps this by enhancing transparency on internal controls, but in a way that is proportionate and minimises reporting burdens on businesses."
He added: "The small, but important, change to the expectations on internal controls will better support boards asking the right questions at the right time to help them gain the level of the assurance they require and to be able to demonstrate good governance to investors to and other stakeholders". Right now, bosses should check their company's controls every year.
But new rules mean they'll have to tell us how they've checked their systems and say if they're working well. Companies will also have to explain when controls don't work and what they're doing to fix it, plus any steps they've taken to sort out past problems. The new measures will kick in from January 2026, a year later than initially planned, to give firms more time to develop their approach to internal controls.
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Other new requirements, set to start in 2025, include firms outlining malus and clawback provisions in directors' contracts covering renumeration. Companies will need to publish details of these clauses every year and explain how they have been used in the past year and why.
The FRC has decided against giving auditing committees new responsibility over environment, social and governance issues. It has also dropped plans to impose diversity and inclusion reporting and rules on how boards should engage with shareholders. The watchdog said the changes have been kept to a minimum to ensure expectations for effective governance are "targeted and proportionate".
The principle of boards having the flexibility to "comply or explain" will remain to ensure governance expectations are better tailored to the specific circumstances of each company, the FRC said. This means large listed companies can ignore the code requirements so long as they explain why they have done so. Mr Moriarty stated: "It is important that the flexibility of the comply or explain principle is properly utilised."
"The FRC is clear that compliance can mean either complying with the code provisions as set out, or providing a cogent and justified explanation for why a provision is not suitable in the specific circumstances for the company whilst demonstrating the principles of good governance."
With plans to publish new guidance related to the rules on January 29, this change comes after Business Secretary Kemi Badenoch froze actions towards introducing legislation punctuated by governance reporting regulations. This pause is the newest in a string of hold-ups impacting reforms, relating to accounting regulation which have been anticipated since the Carillion collapse in 2018.
Julia Hoggett, Chair of the Capital Markets Industry Taskforce, has expressed her approval of the FRC's moderate approach. She said: "Fundamentally, high standards of corporate governance are one of the UK's strengths, as are having principles-based regimes designed to be straightforward to implement to maximise compliance, efficacy and impact the FRC's changes to the code reflect these very principles."
Dr Roger Barker from the Institute of Directors (IoD) also commented, saying: "Overall, the FRC has sought to find a balance between upholding high standards of governance and ensuring the competitiveness of UK listed companies. Some of the more prescriptive proposals, which the IoD challenged in our consultation response last Summer, have been dropped."
"Also, it made no sense to undertake a more wide-ranging revision at this time if broader reforms of corporate reporting were not being pursued by the Government."
* An AI tool was used to add an extra layer to the editing process for this story. You can report any errors to [email protected]
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