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Recent developments in the shifting UK corporate governance landscape

UK corporate governance scrutiny prompts Code revision. Companies assess risk management ahead of Jan 2024 publication. Early engagement crucial for effective risk frameworks.

In recent years, corporate governance in the UK has come under scrutiny, driven in part by the high-profile collapses of a number of companies. In response, the UK Government commissioned three independent reviews, all of which revealed systemic issues in auditing and corporate governance standards. It is crucial for organisations to be aware of the possible compliance risks that changes in governance could present.

Government efforts to date

In 2021, the Government proposed significant reforms in its Restoring Trust in Audit and Corporate Governance white paper, akin to the stringent reporting regime of the Sarbanes-Oxley Act (SOX) in the US.

However, these proposed reforms faced resistance due to concerns about their potential negative impact on the UK market's competitiveness. Consequently, the government opted to scale back most of the proposals, amid fears that stricter corporate governance rules could prompt companies to leave the FSTE100 or seek listings elsewhere.

In June 2023, following the government’s invitation, the Financial Reporting Council (FRC) introduced planned changes to the UK Corporate Governance Code for consultation. This was done against a backdrop of two separate pieces of legislation, which focused on creating a new audit industry regulator and enhancing reporting requirements for public and large private companies.

Despite these efforts, further criticism from the business community resulted in the business secretary dropping the legislation that would have tightened corporate governance rules for corporate companies. At the same time, ministers delayed the legislation to set up the new regulator, which led to further adjustments in the proposed reforms. 

Richard Moriarty, FRC chief executive, announced a significant reduction in the proposed changes, dropping more than half of the originally suggested 18 alterations. Notably, the scrapped provisions included increased requirements for audit committees and reporting related to audit and assurance policy, distributable profits, and resilience statements.

Amidst these developments, the main change the FRC is committed to advance is related to the proposal concerning internal controls. While the specifics are yet to be finalised, companies will be required to report on their internal controls. It is important to note that the UK approach will differ from the US approach, which is seen by many as more rigid and burdensome.

Preparing for future governance changes

The revised Code is set to be published in January 2024, meaning it would be prudent for companies to critically assess their risk management and internal control systems. 

As it remains to be seen what corporate governance changes will be enacted by the Government, companies should seek to establish appropriate risk frameworks to protect themselves. While the FRC establishes an implementation timeline, early and proactive engagement is key to ensuring compliance and bolstering stakeholder and public confidence. Businesses should remain aware of the forthcoming revised Code as they adapt to the evolving landscape of UK corporate governance.

To aid organisations seeking to proactively mitigate their risk, Marsh has developed a comprehensive risk management service that can help companies better prepare for future regulatory compliance.

For further discussion on how the upcoming changes may affect your company, please reach out to your Marsh Advisory contact for more information on what support we can offer.