Publication of FRC 2024 UK Corporate Governance Code

On 22nd January 2024, the FRC published its much anticipated revised Code of Corporate Governance. We’ve summarised the main changes concerning Executive Remuneration that you should be aware of in the article below.

On 22 January 2024, the new revised Code of Corporate Governance was published by the Financial Reporting Council (FRC). It’s worth bearing in mind that the consultation on the draft Code in May last year came ahead of some fairly vocal public opposition to already disproportionate regulatory burdens on UK companies, primarily linked to the attractiveness of London as a competitive market (this included Julia Hoggett of the London Stock Exchange, as well as an open letter from the Capital Markets Industry Taskforce (CMIT) calling for a reset of the UK’s approach to corporate governance principles).

Then in November, the FRC indicated their intention to take forward only a small number of the original 18 proposals set out in the consultation and to stop development of the remainder, recognising the need to balance trust and confidence in governance whilst supporting UK economic growth and competitiveness.

So, it’s not surprising that many of the expected amendments from consultation didn’t materialize (the substantive changes that made it into the code are concerned with increased responsibilities for the Board in relation to a company’s internal controls).

This is true also of the section on Remuneration, where changes are not concerning the structure of pay, or quantum, but more about demonstrating confidence that the Remuneration Committee and the Board are managing governance effectively and rebuilding trust.

Malus and clawback

Specific reference is now made to malus and clawback in provision 37, and a new provision 38 has been added, requiring that companies provide a description of their malus and clawback provisions in the annual report, to include:

• The circumstances in which malus and clawback provisions could be used;
• A description of the period for malus and clawback and why the selected period is best suited to the organisation; and
• Whether the provisions were used in the last reporting period. If so a clear explanation of the reason should be provided in the annual report.

These additions will be ever more pertinent with recent press coverage of a number of high profile CEOs who have had malus or clawback applied to them following their departure.

Removal of Provision 40

Another change, intended to remove banal wording within company reporting, is the removal of the original provision 40, which dealt with the Remuneration Committee having regard to certain characteristics in determining exec pay policy and practices – namely, clarity, simplicity, risk, predictability, proportionality and alignment to culture. Often these headlines were reported in a very generic manner or repeated boilerplate, without providing specific examples of how they applied to the specific company circumstances. Hence their removal.

Omission of proposed ESG wording

Proposed changes to strengthen links between Executive pay and ESG objectives didn’t make the cut this time, which is aligned with removal of obligations that were proposed for Audit Committees, given that further clarity is called for.

More generally, the principle of “Comply or Explain” is upheld, but there is recognition that there are instances when strict adherence with the Code’s detailed provisions may not be the right approach for a company. Explanations should be tailored appropriately for individual company circumstances and more flexibility for Boards in applying the principle is encouraged.

Effective date: with the exception of the provisions relating to Internal Controls, the new Code will apply to all accounting periods beginning on or after 1 January 2025.