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FRC consults on changes to the UK Corporate Governance Code

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24 Apr 2014

The Financial Reporting Council (FRC) has today published a consultation (“the consultation”) on proposed changes to the UK Corporate Governance Code (“the Code”). The proposed changes, if implemented, will apply to financial years beginning on or after 1 October 2014.

The proposals stem from earlier consultations on directors’ remuneration (October 2013) and risk management, internal control and the going concern basis of accounting (November 2013).  As a result of those consultations and feedback received, the FRC is proposing changes in the Code in relation to: 

Directors’ remuneration 

The FRC proposes changes to Sections D and E and Schedule A of the Code.  It proposes that:

greater emphasis be placed on ensuring that remuneration policies are designed with the long-term success of the company in mind, and that the lead responsibility for doing so rests with the remuneration committee;

companies should put in place arrangements that will enable them to recover or withhold variable pay when appropriate to do so, and should consider appropriate vesting and holding periods for deferred remuneration; and

companies should explain when publishing AGM results how they intend to engage with shareholders when a significant percentage of them have voted against any resolution.

Risk management and going concern

The FRC proposes changes to Section C of the Code relating to principal risks and monitoring the risk management system and future viability and going concern.  It proposes that:

companies should state in their financial statements whether they consider it appropriate to adopt the going concern basis of accounting and identify any material uncertainties to their ability to continue to do so;

companies should robustly assess their principal risks and explain how they are being managed and mitigated;

companies should state whether they believe they will be able to continue in operation and meet their liabilities taking account of their current position and principal risks, and specify the period covered by this statement and why they consider it appropriate. It is expected that the period assessed will be significantly longer than 12 months; and

companies should monitor their risk management and internal control systems and, at least annually, carry out a review of their effectiveness, and report on that review in the annual report.

The above will require companies to make two separate statements covering a company’s future viability and going concern.  The FRC comments that “the proposed wording attempts to deal with the matters to be considered when making the assessment, the time horizon that it covers, and the degree of certainty that can be attached to it in a way that would encourage companies to provide meaningful disclosure tailored to the specific circumstances of the company rather than producing standardised or heavily qualified statements”. 

Alongside the proposed changes to the Code, the FRC is also consulting on extracts from its proposed integrated going concern, risk management and internal control guidance for directors of listed companies.  The FRC proposes, in an appendix to the consultation, draft guidance to directors on adopting and reporting on the going concern basis of accounting and also draft guidance to directors on providing the longer term viability statement.  This draft guidance reflects comments received to its earlier consultation Risk management, internal control and the going concern basis of accounting: Consultation on draft guidance to the directors of companies applying the UK Corporate Governance Code and associated changes to the code’.  

Aside from the changes to the Code the FRC highlights that: 

  • It intends to issue separate guidance to the directors of banks on solvency and liquidity risks and the going concern basis of accounting as indicated in its November 2013 consultation.  The previous guidance consulted on in November will be updated to reflect the outcome of the consultation.
  • It will revise auditing standards to maintain consistency with the results of the consultation and will issue those revised standards alongside the revised Code.

Location of corporate governance disclosures 

The consultation also seeks views on “whether there would be benefits in allowing companies to publish some or all of the information currently contained in the corporate governance report on a website rather than in the annual report and accounts”.  If respondents agree that this would be beneficial this change will be considered in 2016. 

The FRC invites comments, in writing, until 27 June 2014. 

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