Navigating the 2024 UK Corporate Governance Code: Insights from Shoosmiths

The recent publication of the 2024 UK Corporate Governance Code introduces several targeted changes in a move to build on the transparency and accountability requirements for corporate practices brought in by the current version of the Code.

The recent publication of the 2024 UK Corporate Governance Code (the 2024 Code) and associated guidance introduces several targeted changes in a move to build on the transparency and accountability requirements for corporate practices brought in by the current (2018) version of the Code (the 2018 Code).

The 2024 Code applies to companies with a premium listing on the London Stock Exchange across all sectors, however, many businesses choose to follow the code even when they are not required to do so. The updated Code will apply to financial years beginning on or after 1 January 2025 and the key regulatory shifts are summarised below.

In short, the changes focus primarily on internal controls and, in a move generally welcomed by stakeholders, many of the wider ranging and potentially more onerous changes and additions consulted on have not been brought forward into the published code. The Financial Reporting Council (FRC) has tried to strike a balance between facilitating corporate competitiveness and protecting market participants and stakeholders.

Key changes and implications

Governance reporting and outcomes

 The 2024 Code includes a new Principle C to focus governance reporting on board decisions and their outcomes in the context of the company’s strategy and objectives. The board should provide a clear explanation where it reports on departures from the Code’s provisions, and move away from making ‘boilerplate’ statements, which have been criticised previously by the FRC as unhelpful.

Board diversity

Recognising the instrumental role of diverse perspectives in driving innovation, fostering better decision making and mitigating risk, Principal J (which introduced enhanced requirements for board diversity in the 2018 Code) has been broadened. The 2024 Code encourages broader representation by removing the list of diversity characteristics, indicating that diversity policies can be wider ranging and allowing greater flexibility.

Director’s remuneration

Provision 37 has been amended to include that contracts and/or other agreements relating to director remuneration should include malus and clawback provisions. It is supported by a new Provision 38 that broadens companies existing requirement to report (i) the measures in place relating to malus and the clawback of directors’ remuneration in the event of misconduct or other serious failings, (ii) the period of time the measures relate to, (iii) why this time period is suitable for the organisation, and (iv) whether the measures were used in the last reporting period.

Enhanced governance practices

The 2018 and 2024 Codes both underscore the importance of robust governance structures, urging companies to bolster accountability and transparency mechanisms. Together with the ‘Minimum standard: Audit Committees and the External Audit’ published in May 2023, this includes strengthening audit committee oversight, enhancing risk management practices, and fostering a culture of integrity and accountability. Principal O in the 2024 Code is amended to make the board responsible for maintaining the effectiveness of the risk management and internal control framework as well as simply establishing such a framework.

Annual reporting on risk management and internal control framework maintenance

 A new Provision 29 will apply for financial years beginning on or after 1 January 2026 requiring a company’s board to carry out a review (at least annually) of the effectiveness of the company's risk management and internal control framework and publish certain disclosures relating to this review in its annual report.

You can find a summary of the key changes published by the FRC (who oversee the code) here: UK Corporate Governance Code 2024 Key Changes (frc.org.uk), along with a useful 2024 Code 'mythbuster': UK Corporate Governance Code 2024 mythbuster (frc.org.uk).

Conclusion

The 2024 Code introduces limited, but targeted, changes that build on the new era of corporate responsibility and transparency heralded by the 2018 Code, challenging businesses to elevate their governance practices to align with evolving societal expectations. Notwithstanding such changes, the 2024 Code’s continued and affirmed support for the ‘comply or explain’ basis of reporting is welcome, with the FRC recognising that a one size fits all approach is not practicable.

Whilst all companies need to be aware of the updates to the Code, for companies who have embraced the ethos of the 2018 Code, compliance with the 2024 Code should not represent a large shift from their current practices.

Shoosmiths is committed to assisting businesses in fortifying their governance frameworks to meet these heightened expectations and uphold best practices in corporate governance. For tailored guidance on navigating the implications of the 2024 Code for your business, please reach out to us for expert assistance.