In 2018, the Financial Reporting Council (FRC) announced the UK Corporate Governance Code, which provides guidance in key governance areas, including board leadership, roles and responsibilities, composition, compensation and more. The goal of the code was to help businesses align their strategy with their culture and values — a difficult balance for many boards to strike.
While important, the Corporate Governance Code adds even more oversight to board directors’ overflowing plates. To help understand what the code is and how best to manage its requirements, this blog will explain:
- What the 2018 UK Corporate Governance Code is and if it’s mandatory
- Who the governance code applies to and when
- The FRC’s ongoing guidance
- Possible revisions
- How entity management tools can help you comply
What is the UK Corporate Governance Code?
The UK Corporate Governance Code is a regulation that outlines corporate governance requirements. The five main principles of the code are:
- Board leadership and company purpose
- Division of responsibilities
- Composition, succession and evaluation
- Audit, risk and internal control
- Remuneration
In each of these areas, the Corporate Governance Code offers a set of principles and provisions. The principles outline how boards should conduct themselves when doing business in any of the aforementioned areas, while the provisions explain what board directors should do in a specific situation, like when a director resigns.
Is the UK Corporate Governance Code mandatory?
The UK Corporate Governance Code is a code, not a law, so compliance isn’t mandatory. Instead, the FRC asks businesses to ‘comply or explain,’ meaning they can either comply with the code or explain why they’ve chosen to implement good governance differently.
That said, enacting and monitoring compliance with the code is crucial to signal to shareholders and stakeholders that you’re serious about integrity and diversity from the top down.
What is the importance of the UK Governance Code?
The UK Corporate Governance Code is important because it encourages businesses to offer more transparency around their governance practices.
Prior to the code, different boards had a different approach to governance. This often made it difficult for investors to compare one organization against another. It also made it harder for investors to assess whether or not the business’s purpose, values and integrity align with their own.
The UK Corporate Governance Code attempts to codify good governance in a clear regulation that both investors and businesses can engage.
Who does the code apply to?
The Corporate Governance Code applies to companies with a premium listing on the London Stock Exchange, whether incorporated in the UK or not. In fact, the UK Listing Rules for the London Stock Exchange overlap with the Code.
To comply with the Listing Rules, organizations have to show that they either comply with the code or explain why they’ve chosen another approach to governance.
When does the UK Corporate Governance Code apply?
The code applies as soon as a business becomes premium listed. From then on, the business must report on their compliance with the code, particularly any areas of noncompliance, and detail a timeline for when those areas will become compliant. The FRC recommends that businesses begin to consider and prepare for the UK Corporate Governance Code ahead of their listing, if possible.
The FRC’s guidance on the Corporate Governance Code
The UK Corporate Governance Code may only be appropriate for some businesses in some industries. The FRC offers ongoing guidance through publications to help businesses apply the code to their circumstances. These publications help boards, audit committees and risk management teams operate more effectively in light of the code’s requirements.
The FRC has currently published three guides:
- Guidance on board effectiveness
- Guidance on audit committees
- Guidance on risk management, internal controls, and related financial business
Potential revisions to the UK Corporate Governance Code
The FRC recently completed three independent reviews, each assessing the advantages and disadvantages of the UK Corporate Governance Code as it relates to audit products, the audit services market and the regulation of that market.
These reviews are critical because they will inform the FRC’s revision to the code and because the UK government is likely to legislate the reforms. The revisions and legislation will continue to cover board directors but will also include key tenets of entity management like internal controls, corporate reporting, preparers of financial and non-financial information, auditors and actuaries.
According to the FRC, the revisions will focus on:
- Strengthening the code’s existing provisions in response to opportunities identified in recent research and reports from the FRC
- Implementing a framework for creating and reporting on the effectiveness of internal controls in year-end reporting
- Broadening the oversight of the board and audit committees to include sustainability and ERG reporting — including for subsidiaries.
- Emphasizing the importance of diversity in the audit process
- Covering the government’s proposed changes to legal and regulatory requirements
Streamline compliance of the UK Corporate Governance Code for your entities
The UK Corporate Governance Code may have its drawbacks. But it also offers a valuable framework for transparent, defensible corporate governance practices.
Moreover, the code is likely here to stay and will only intensify as the UK government heightens its laws and regulations around corporate governance, audit and internal controls. Boards don’t have to wait for regulations like the code to tighten before they become compliant.
For companies with entities or subsidiaries in the UK, entity management software unlocks an approach to governance that prioritizes financial integrity, investor confidence and sustainable performance — much like the principles in the UK Governance Code itself.
Learn more about how entity management tools can save you time and money without compromising compliance with the UK Corporate Governance Code.
