On the 24 May the Financial Reporting Council (FRC) published its consultation on a number of proposed amendments to the UK Corporate Governance Code (the Code). This note covers some of the FRC’s main proposals. 

The FRC believes that key proposals will help strengthen the framework of prudent and effective risk management and internal controls. The consultation states that the proposals ‘are aimed at providing a stronger basis for reporting on, and evidencing the effectiveness’ of the framework of controls and risk management.

The FRC proposes that all companies reporting against the Code should consider producing an Audit and Assurance Policy on a ‘comply or explain’ basis.

Having considered recommending that Code companies should have sustainability committees, the FRC decided not to pursue this approach having reached the view that companies ‘are building experience in different ways’ and stating its conclusion that the issues related to sustainability and ESG might be better dealt with ‘by risk committees, people committees, management teams or external experts’.

The FRC believes that as audit committees have the experience of setting policies and frameworks their role could be adapted to cover ESG metrics and that they should oversee ESG disclosures, controls, processes, and assurance rather than asking companies to establish new arrangements. 

The FRC is proposing amendments to Code Provision 29 (which will become Provision 30), these will ask the board to declare whether it ‘can reasonably conclude that the company’s risk management and internal control systems, including material operational, reporting and compliance controls, have been effective throughout the reporting period and up to the date of the approval of the annual report by the directors’. The board should be able to support the basis for its declaration, including how it has monitored and reviewed the effectiveness of these systems. The board will also be asked to report any material weaknesses identified in these systems and what action has been taken to address them. The FRC states that the aim of its approach is ‘to avoid a situation where the review of effectiveness is seen as a one-off exercise, and which only assesses the effectiveness of the company’s systems at one point in time’. 

The consultation also includes plans to strengthen reporting by companies on their malus and clawback arrangements in relation to directors’ remuneration in the event of serious failings or misconduct.