Preparations for the revised UK Corporate Governance Code are progressing, but clear areas for improvement have been identified by the regulator as the countdown to a January 2025 start date continues.

The Financial Reporting Council’s (FRC) Annual Review of Corporate Governance Reporting 2024 warns that although reporting quality remains strong, there is a need for more concise, outcomes-focused disclosure and enhanced reporting on risk management and internal controls.

The regulator also highlights the need for more thorough reporting on how boards assess and monitor culture and promote the desired culture of their organisations. Meanwhile, outcomes arising from shareholder and stakeholder engagement need to be more clearly articulated, the FRC says.

Comply or explain

The review emphasises the continued importance of the Code’s ‘comply or explain’ approach, which allows companies to depart from provisions when circumstances warrant provided they offer high-quality explanations for their alternative approach. 

Although companies are making good use of this flexibility, the FRC says there is scope for improvement in the quality of explanations for departures. It urges investors, proxy advisers and service providers to support those companies that provide cogent explanations that demonstrate good governance.

The revised Code, due to take effect from January 2025, maintains its principles-based approach while emphasising outcomes-focused reporting and enhanced risk management. A key change is the introduction of Provision 29 – which comes into effect in 2026 – and which will require strengthened reporting on risk management and internal controls from 2027.

New Provision 29 requirements

The FRC says it is encouraged to see several companies already outlining their preparation work for the new Provision 29 requirements. However, the review also highlights that these areas still require attention in some cases as the detailed analysis of 130 companies found that 25 failed to report, or report clearly, on the effectiveness of their internal controls as already required under the previous Corporate Governance Code (2018).

Peter van Veen, ICAEW’s Director of Corporate Governance and Stewardship, says given the timings at play it was interesting that the FRC had already fired the starting gun by doing this analysis.

“The review paid particular attention to analysis of risk disclosure practices and the FRC is sending out a signal that it already expects some reporting on this area,” he says. “Some companies are ahead of the game, but quite a few are not yet engaging with this topic at all. I suspect next year it’ll be a tougher message that you’ve got a year to get your act together.” 

Minimum standard for audit committees

The FRC review also analysed adoption of the minimum standard for audit committees, which launched last May and will take effect for accounting periods starting on or after 1 January 2025. It said evidence of early adoption was encouraging. “Companies need to be mindful that this is going to become a hard requirement and not a comply or explain requirement as is currently the case, so they need to start thinking hard about how to report against that.”

Meanwhile, disclosure of corporate culture continues to evolve. “While the breadth of reporting has widened, the depth is lagging and in some cases, for example culture assessment and monitoring, has decreased,” the report says. 

Van Veen says examples of best practice highlighted in the review set useful benchmarks around the expectations of the regulator. “Reporting on corporate culture is an area that initially proved problematic. But there is now a good body of evidence, and the report highlights this, that companies are providing some insightful reporting on this area.”

Flexibility is fundamental

In a statement, Mark Babington, FRC Executive Director of Regulatory Standards, said: “The flexibility of the Code remains fundamental and we’re pleased to see companies using this appropriately. As we approach this significant transition period, the FRC is committed to supporting companies with various tools and resources to enable effective implementation of the new Code.”

The FRC has also published a series of podcasts relating to key aspects of the revised code, including outcomes-based reporting, comply or explain optionality, audit committee minimum standards, diversity and culture.

• Read the FRC’s Annual Review of Corporate Governance Reporting 2024 in full.