What non-executive directors need to know about the latest updates to the Code
As a NED, staying informed with the latest governance changes is important. The Financial Reporting Council (FRC)’s 2024 UK Corporate Governance Code (the Code) introduces several key updates which non-executive directors must understand to fulfil their responsibilities. These changes have been introduced to enhance governance standards, transparency and accountability within companies.
Navigating the changes to the Code and understanding its impact
The updated 2024 Code takes a targeted approach, focusing on a limited number of changes to ensure the right balance is struck between UK competitiveness and positive outcomes for companies, investors and the wider public. The main, substantive change from the 2018 version of the code is in relation to internal controls.
🔹Principle O: Audit, Risk and Internal Control
The first specific change involves Principle O under Section 4 of the Code (Audit, Risk and Internal Control), which has been amended to make the board responsible for not only establishing, but maintaining the effectiveness of the risk management and internal control framework.
Alongside this change, Provision 29, which focuses on monitoring and reviewing the effectiveness of the risk management and internal control framework, has been expanded. It now includes a requirement for:
- a description of how the board has monitored and reviewed the framework’s effectiveness;
- a declaration by the board, as a whole, of the effectiveness of the material controls as of the balance sheet date; and
- a description of any material controls that have not operated effectively, along with the actions taken or proposed to improve them.
The FRC makes it clear that this disclosure is different from the US Sarbanes-Oxley Act of 2002 (SOX). As noted above, the Code changes focus on material controls, which encompass non-financial, operational, and compliance controls on a “comply-or explain” basis, while US SOX focuses in much more detail on internal controls over financial reporting and requires significantly more reporting to the regulator.
As a result, the changes to internal controls introduce greater accountability for the effectiveness of the risk management and internal control framework, and encourage a more proactive approach by the board. NEDs play a crucial role in this process, ensuring that they not only challenge current issues but also anticipate potential risks and oversee the measures implemented to mitigate them. This proactive stance, aligned with the organisation’s risk appetite, is essential for maintaining robust governance and safeguarding the organisation’s long-term success.
🔹Other changes: Section 1
Other changes include the introduction of a new principle in Section 1 of the Code (Board Leadership and Company Purpose), highlighting that governance reporting should focus on board decisions and their outcomes in the context of the company’s strategy and objectives, ultimately encouraging companies to move away from boilerplate disclosures. An amendment has also been made to Provision 2, emphasising that companies should not only assess and monitor culture, but also evaluate how the desired culture has been embedded.
🔹Other changes: Section 3
Under Section 3 of the Code (Composition, Succession, and Evaluation), diversity-related changes have been introduced, including Principle J which promotes diversity, inclusion, and equal opportunity without referencing specific groups. This change removes the previous list of characteristics to acknowledge that board and senior management diversity policies can be wide-ranging. Changes have also been made to Provision 23, which sets out diversity-related disclosure requirements for the nomination committee. By placing additional focus on these policies and refining their framework, boards can become more innovative and dynamic. This broader approach will help them to consider a wider range of matters in their decision-making processes, ultimately leading to better long-term outcomes.
🔹Other changes: Sections 4 and 5
Additional changes have also been made to Section 4, alongside the internal control changes listed above, and Section 5 (Remuneration) of the Code. Provisions 25 and 26 under Section 4 have been updated to remove duplication with the FRC Audit Committees and External Audit: Minimum Standard. Under Section 5, amendments have been made to enhance the transparency of reporting on malus and clawback. Provision 40 of the 2018 version of the UK Corporate Governance Code (which listed six factors for remuneration committees to consider in setting executive remuneration) has been removed.
While some of these changes may seem minor, significant consideration should be given to them as they will enable NEDs to positively contribute to the board through independent oversight and constructive challenge. It is crucial for NEDs to ensure their organisations navigate these changes effectively.
These changes will require NEDs to actively participate in board discussions, from overseeing and ensuring the company’s culture aligns with its values and objectives, advocating for inclusive practices that promote equal opportunities for all, to being more involved in evaluating and ensuring the effectiveness of their organisation’s internal controls. Whilst some of these new discussions may introduce some challenges, they may also offer opportunities for NEDs to further actively engage in discussions focused on compliance, the promotion of diversity, and ultimately help their organisation navigate future organisational changes effectively while maintaining a robust approach to governance.
Comply or explain: what does implementation mean for you?
The FRC encourages boards and investors to embrace the flexibility offered by the Code’s “comply or explain” approach, which allows companies to tailor their governance arrangements to fit their unique circumstances. The 2024 UK Corporate Governance Code is built on high-level principles supported by more specific provisions. Companies are expected to apply these principles, but they have the option to take a different approach that suits them better. If they choose to take a different approach, they must provide an explanation for their departure from the provisions.
Both compliance and explanation are equally valid, and it’s important to remember that an explanation is just as valuable as strict compliance. This flexibility ensures that governance practices can be adapted to meet the specific needs of each company.
NEDs may wish to take this into account in their future board and committee discussions and consider that compliance may not always be the best option for their company’s current circumstance. Discussions instead should be focused on how boards can continue to carry out their role effectively, demonstrating effective governance whilst taking into account the company’s size, the sector it operates in, and the company’s level of maturity.
How should NEDs prepare for the 2024 Code?
To help their organisations navigate the transition to the 2024 Code and maintain strong governance practices, NEDs should take these key steps:
Conclusion
As highlighted, NEDs play a crucial role in ensuring their organisations successfully navigate these updates. The UK has a strong record in delivering high standards or corporate governance and most companies will see little change to their approach to governance. However, where transition is needed, a proactive approach from the board will facilitate a smooth implementation. Commitment to upholding high standards of governance through robust practices will not only ensure your company remains resilient and well-governed, but it will also implement trust and contribute to the long-term success and sustainability of your organisation.
The Code is applicable to all companies listed in the ‘commercial companies’ category or the ‘closed-ended investment funds’ category, whether incorporated in the UK or elsewhere. The 2024 Code applies to accounting periods beginning on or after 1 January 2025, with the exception of Provision 29. Changes to Provision 29 are applicable for accounting periods beginning on or after 1 January 2026.
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The article has been written by the Financial Reporting Council.
