FRC unveils watered down changes to governance rules for company directors

Britain’s auditing watchdog has published a new set of governance rules for company directors, which have been watered down from the originally proposed changes in a bid to safeguard UK competitiveness.

The Financial Reporting Council (FRC) on Monday unveiled revisions to the UK corporate governance code, which applies to firms with a premium listing on the London Stock Exchange.

The most significant change is that directors will be required to annually sign off on the effectiveness their companies’ internal controls.

The watchdog made a small number of further revisions but they come as a fraction of the 18 proposals originally set out in its consultation last May.

FRC chief executive Richard Moriarty, who joined the council in October, has already announced that he planned to drop most of the earlier proposals in November, which was seen as a major row back on its earlier aims to overhaul the governance code.

He put part of the decision down to the FRC’s need to balance “supporting UK economic growth and competitiveness”, as well as to boost trust in governance, following on from responses to its consultation over the summer.

The move demonstrates the tension between those pushing for improved UK governance rules following high-profile corporate failures like outsourcing giant Carillion and bakery chain Patisserie Valerie, and City concerns that heavy-handed requirements will damage UK competitiveness.

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.

“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”.

Directors are already meant to review the effectiveness of their financial, operational, reporting and compliance controls annually.

But the new measures will require them to describe how they have have monitored and reviewed the effective of their systems and declare the effectiveness of controls they deem materially important.

The firms must also describe how any controls have not operated effectively and the action taken or proposed to improve them as well as any action taken to address previously reported issues.

These measures will come into force from January 2026 – a year later than previously signalled to give firms more time to develop their approach to their internal controls.

Other new requirements, which will come into force in 2025, include firms outlining malus and clawback provisions in directors’ contracts covering renumeration.

Firms will need to publish details of these clauses every year and describe how they have been used in the past year and why.

The FRC dropped plans to give auditing committees new responsibility over environment, social and governance issues.

It has also scrapped proposals to impost 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 said: “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.”

The FRC said it will publish digitally accessible guidance associated with the code on January 29.

The watered down changes also come after Business Secretary Kemi Badenoch put plans on ice for legislation that would have paved the way for new governance reporting rules for large companies, with the Government citing the need to cut red tape for businesses.

It marks the latest in a series of delays and set backs to reforms of accounting regulation, which have been long-awaited since the collapse of Carillion in 2018.

Julia Hoggett, Chair of the Capital Markets Industry Taskforce, was among those who welcomed 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, director of policy and corporate governance at the Institute of Directors (IoD), said: “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.”