New UK Corporate Governance Code: carefully choreographed

Published Date
Jan 22, 2024
Today saw the publication by the Financial Reporting Council (FRC) of its revised corporate governance code (the Code). Whilst the updated Code contains a limited set of targeted changes, as opposed to a broader wholesale review, the significance of the changes and the accompanying commentary should not be underestimated.

This bulletin comments on three aspects of the changes:

  • Reinforcement of the “comply or explain” nature of the Code.
  • The focus on evidencing the outcomes of good governance.
  • The new requirement for a board declaration on the effectiveness of internal controls.

Revised guidance to accompany the Code is expected to be published on 29 January 2024. The new guidelines should shed more light on how the Code is to be applied and reported upon. In particular, the impact of the new requirements relating to internal controls cannot be properly assessed until such guidance is published. The observations in this bulletin are therefore preliminary and we will publish a more substantive assessment once the revised guidelines have been published.

The new Code should be seen in the context of the broader set of industry reforms. As the UK shifts to a disclosure-based regime where the quality of ongoing engagement between companies and their investors sits at its core, the Code and accompanying guidelines have a material influence on the scope and tone of those engagements and a role to play in any recalibration of behaviour.

The publication of the new Code is preceded by the FRC’s policy update of 7 November 2023, the Chancellor’s remit letter to the FRC on 22 November 2023, emphasising growth and international competitiveness, and UK Capital Markets Industry Taskforce’s open letter on corporate governance on 22 November 2023.

In response to stakeholder feedback about the need for boards to have more time to develop their approaches to internal controls, the new Code expectation for the board declaration on effectiveness will come into effect from 1 January 2026, one year after the rest of the updated Code comes into effect from 1 January 2025.

Links to the new Code, the FRC press release and FRC publication showing changes to the Code can be found here.

“Comply or explain” regime

Readers will be familiar with industry concerns regarding how the “comply or explain” regime operates in practice – a view that the regime is more “comply or else” – and that the test should be reformulated to be “apply or explain”, given the current emphasis on compliance which is seen as imposing an unnecessary burden on businesses. Notwithstanding evidence that more companies are willing to explain areas of non-compliance, there remains concern that companies are penalised for non-compliance and have limited ability to engage with investors and their agents to explain instances of non-compliance.

It is clear that the FRC, the Financial Conduct Authority and the Government believe in the value and strength of the “comply or explain” regime. They go to lengths to point out that the application of and compliance with the Code should be tailored to the circumstances of individual companies (reflecting upon their business model, maturity, size and complexity) and that the Code should be applied proportionally. They see stewardship exercised through transparency and meaningful disclosures and from engagement with investors on those disclosures. If investors have a different view, they should engage with and give companies sufficient time to explain their position.

It is difficult to disagree with this logic. The challenge is to ensure that this is what actually happens in practice, which is where the current focus is. The upcoming review of the Stewardship Code, described by the FRC as being “fundamental”, will give plenty of opportunity to explore and debate these issues.


Good governance is not just about a company's governance framework, but about how governance operates in practice, results in good outcomes and evidences these outcomes. The reporting of governance should identify and report on the governance activities undertaken and articulate the contribution of those activities to the achievement of a company’s strategy, to the health of its relationships with its key stakeholders, and in upholding its culture, values and purpose.  

The inclusion of a new principle (Principle C) reinforces and codifies this position, which is already promulgated by the FRC in its annual and thematic reviews of corporate reporting.

Risk management and internal controls

The new Code will require boards to include a declaration in their annual reports as to the effectiveness of a company’s material controls. The declaration will need to cover all material controls, not just financial controls. So, it will extend to financial, operational, reporting and compliance controls. 

It is up to the board to determine what its material controls are. The FRC emphasises that this will vary for each company and believes that their approach is a targeted, proportionate and balanced response which minimises reporting burdens on businesses. Helpfully, the effectiveness declaration is now a point-in-time declaration (as at the balance sheet date) rather than continuous one, and disclosure of material weaknesses is now focused on material controls that have not operated effectively.

Once the revised guidelines are published we will have further visibility on what the regime requires and how it might be implemented in practice. Some important questions remain:

The basis upon which an effectiveness statement can be made – the framework or set of standards/rules to be applied in arriving at a view on the effectiveness of internal controls. Perhaps oversimplifying it, but we can copy or borrow from existing rules or we will need to devise our own set of rules, which would require time and capacity to do so. It is to be noted that the FRC considers that the UK approach will be much less intrusive than the approach adopted in the U.S.

Whilst independent third-party assurance of the effectiveness declaration is not required, another key question, to be decided by market practice, is the extent to which boards will seek third party assurance and the ability of assurance providers to provide such assurance. It may not be possible, at least initially, to obtain external assurance for all aspects of internal controls.

The FRC intends to host a webinar on 23 January 2024 to provide insights on its approach to the Code’s consultation and the key areas where the Code has been updated, as well as a deep dive into the internal controls section of the Code on 30 January 2024.

Our view

We are optimistic of the direction of travel. There has been a general pause in overlaying new governance requirements (although, at a future date, we will need to simplify and remove duplication in the existing laws and regulations), and there is to be a more fundamental review of how stewardship operates in the UK. The Government and the regulators are responding to industry concerns and, whilst there are differences of opinion, these are in the open and are being debated. A note of caution – we need to remain clear as to responsibility and accountability, and should not lose sight of these in our drive to make the UK more competitive. Monitoring and enforcement of the Code (and of other laws) is part of the debate.

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This content was originally published by Allen & Overy before the A&O Shearman merger