Looking ahead to the UK Corporate Governance Code 2024: the FRC publishes its annual Review of Corporate Governance Reporting

In November, the Financial Reporting Council (the “FRC”) (the independent regulator for auditors, accountants and actuaries in the UK, responsible for setting the UK's Corporate Governance and Stewardship Codes) published the 2024 edition of its annual Review of Corporate Governance Reporting (the “Review”), which follows on from the publication of its Annual Review of Corporate Reporting in September (see our recent blog post here).

The Review assesses the corporate governance reporting of a sample of FTSE 100, FTSE 250 and small cap companies against the 2018 version of the UK Corporate Governance Code (the “2018 Code”). The revised version of the UK Corporate Governance Code published earlier this year (the “2024 Code”) (see our recent blog post here) will apply to all companies listed in the equity shares (commercial companies) category and the closed-ended investment funds category of the Official List for financial years beginning on and after 1 January 2025[1]. The Review is therefore the FRC’s penultimate assessment of reporting against the 2018 Code. 

Looking ahead to the 2024 Code

The Review sets out examples of good corporate governance reporting and explores areas for improvement to develop the quality of such reporting and to support companies in preparing to implement the 2024 Code.

The most significant change introduced by the 2024 Code, through the revised Provision 29, is the broadening of the board’s obligations and accountability in relation to the effectiveness of internal controls. Provision 29 of the 2018 Code requires that boards monitor, review and report on all material controls, including financial, operational and compliance controls. Provision 29 of the 2024 Code introduces more extensive obligations and will require the board to provide, in the annual report:

• a description of how the board has monitored and reviewed the effectiveness of the company’s risk management and internal control framework; 
• a declaration of effectiveness, as at the balance sheet date, of the material controls which additionally includes reporting controls; and 
• a description of any material controls which have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them and any action taken to address previously reported issues.

The Review focusses on risk management and internal controls reporting in particular, as companies prepare to report (for financial years beginning on and after 1 January 2026) with the revised Provision 29. The FRC examined reporting against the current requirements of Provision 29 in the 2018 Code in greater depth than the rest of the review, using an extended sample of 130 annual reports. The Review focusses on identifying existing good practice, including setting out elements of good reporting on risk management and internal control, and areas where improvement is required.

The FRC noted that, despite the current Provision 29 requirements, reporting on the effectiveness of internal controls remains at an early stage and 25 companies in the sample did not report at all, or did not report clearly, on whether a review of the effectiveness of internal controls had been carried out. However, and despite no early adopters of the revised Provision 29 of the 2024 Code, the FRC noted its encouragement that a number of annual reports it reviewed had referred to, and outlined preparatory work in relation to, the revised Provision 29 of the 2024 Code. 

Another area of focus in the 2024 Code is a greater emphasis on the importance of outcome-based reporting, and specifically reporting on the outcomes of engagement with shareholders and stakeholders, including workforce engagement. The Review assesses whether companies report effectively on this, and emphasised that the FRC does not expect an outcome to arise, or to be included in the annual report, for every engagement with stakeholders, but it encourages companies to use outcomes-based reporting where it demonstrates an effective engagement mechanism. The Review notes the general high quality of reporting on stakeholder engagement and year-on-year improvement, and sets out examples of good practice, including emphasising that good reporters demonstrated a clear link between engagement activities with their stakeholders and the outcomes reported.

In addition to focussing in the Review on certain reporting provisions that have been revised or enhanced in the 2024 Code to assist companies in preparing to comply with it, the FRC has also published, alongside the Review, a series of other materials (including podcasts and webinars) to support the implementation of the 2024 Code.

Other areas of focus

Beyond preparations for the 2024 Code, the Review has a number of other areas of focus which provide reminders to companies ahead of the approaching reporting season. These include: 

‘Comply or explain’ approach

The Review notes the flexibility of the 2018 Code, which remains a key aspect of the 2024 Code, with the Principles deliberately allowing for interpretation by companies to suit their specific circumstances. A key feature of this flexibility is the ability for companies to either comply with the provisions or explain departures. In the Review, the FRC advocates for explanations that are cogent, clear and provide sufficient detail. In such circumstances, the FRC supports departures from the 2018 Code, although it notes fewer companies departed from the Code during the year subject to the Review.

‘Over-boarding’  

The FRC’s consultation on the 2024 Code explored proposals related to over-boarding, relating to concerns that a high number of board commitments potentially compromises a director’s effectiveness. Despite not adopting the proposed changes, the Review nonetheless reflects on how companies are addressing this issue. The FRC considers that there is generally good, transparent reporting in this area, with over 90% of annual reports in the sample providing specific information on directors’ external commitments.

Sustainability committees

As part of the consultation on the 2024 Code, the FRC considered whether to recommend that companies should have dedicated sustainability committees. Again, despite not adopting this recommendation (ultimately recognising that there is no one-size-fits-all approach to sustainability governance and that companies are building experience in different ways), the Review nevertheless assesses whether the sample companies have a designated board-level committee responsible for environmental matters. The Review states that “while having such a committee is not a Code requirement, it is encouraging to see boards developing bespoke governance arrangements to oversee environmental matters”, indicating the FRC’s continued interest in companies’ approaches to sustainability governance.

[1] Other than Provision 29 which applies to financial years beginning on and after 1 January 2026.