UK Corporate Governance Code reform back on the table

Summary of anticipated changes to the UK Corporate Governance Code

The UK Corporate Governance Code is set to undergo significant reforms following the publishing of the BEIS Consultation (“Restoring trust in audit and corporate governance”) in March 2021. This consultation was prepared in response to recent corporate scandals that highlighted the need for stronger regulations surrounding auditing and corporate governance. These reforms have been nicknamed “UK SOX” due to their resemblance to the US Sarbanes-Oxley Act of 2002. The suggested changes, while compiled by the conservative government at the time were not enacted by them. Following the 2024 general election however, the new labour government have announced their intention to enact these changes as part of the King’s Speech on 17 July 2024.

Motivation for the proposed changes

The Corporate Governance Code changes are intended to address the assessed ineffectiveness of current regulations, including the Companies Act 2006 and the Corporate Governance Code, which have failed to prevent corporate failures like those of BHS, Carillion, and Patisserie Valerie. The goal is ultimately to increase accountability among directors, shareholders, auditors, and regulators by strengthening internal controls and financial reporting practices.4

Anticipated key changes for businesses

Directors are anticipated to face heightened reporting obligations, including requirements for:

• A Director’s Responsibility Statement
• A Statement on Fraud
• A Resilience Statement
• An Audit and Assurance Policy (AAP)

Large private companies with over 750 employees and £750 million in annual turnover will now fall within the scope of Public Interest Entities (PIEs). This classification subjects them to increased scrutiny from the Audit, Reporting, and Governance Authority (ARGA), the new regulatory body expected to replace the Financial Reporting Council (FRC).

Are the suggested changes equivalent to the US SOX regime?

The FRC acknowledges that the UK’s reformed Corporate Governance Code is distinct from US SOX, granting boards more judgment and allowing for a “comply or explain” approach rather than a strict legal mandate. The UK Corporate Governance Code changes will focus on material controls, encompassing non-financial, operational, and compliance controls, while US SOX targets Internal Controls over Financial Reporting, and at a greater level of depth.

Timeline for implementation of changes to the UK Corporate Governance Code

This is not currently known for certain, though directors, particularly those of large private companies which may be included under the expanded PIE definition, are advised to consider the implications of the changes sooner rather than later.

Actions for Businesses to prepare for the changes to the UK Corporate Governance Code

• • Consider the above-mentioned responsibility statements required of company directors, and ensure the required systems and processes are in place to support such a statement being made.
  • Consider the entity’s current checks and balances designed to mitigate errors and prevent fraud and identify where these need to be strengthened.
  • For large private companies, start adopting control frameworks and reporting practices consistent with those of public companies.
  • Pay attention to the current ambiguity surrounding the final form of the regulations and maintain a flexible approach.
  • Stay informed on updates from the FRC and industry insights.
  • Invest in adaptable audit and compliance management software to accommodate evolving regulations.
  • Consult your auditors on what the changes may mean for your entity and where they believe processes and control may need to be strengthened.

Conclusion

The impending implementation of the changes to the UK Corporate Governance Code marks a significant shift in the UK’s corporate governance landscape. While the specifics are still being finalized, C-Suite executives must proactively prepare their organisations for the upcoming changes to ensure compliance, maintain investor trust, and uphold the highest standards of financial integrity.

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