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Introduction

The UK Corporate Governance Code is a cornerstone of good corporate governance practices, promoting transparency, accountability, and stewardship among companies with a premium listing on the London Stock Exchange. In 2024, this influential code underwent significant revisions to further strengthen governance standards and reinforce investor trust in the UK market.

This paper provides an analysis of the key changes introduced in the 2024 UK Corporate Governance Code and their implications for companies subject to its requirements.

The 2024 UK Corporate Governance Code is built upon five key principles:

• Board Leadership and Company Purpose
• Division of Responsibilities
• Composition, Succession and Evaluation
• Audit, Risk and Internal Control
• Remuneration

These principles outline the fundamental expectations for good corporate governance practices, enabling companies to tailor their governance arrangements to their specific circumstances while maintaining high standards.

The Code is applicable for companies with a premium listing on the London Stock Exchange, regardless of where they are incorporated.  The new Code was published on 22 January 2024.  It takes effect from 1 January 2025 except for the Transparency rules which take effect from 1 January 2026.

The Code operates on a ‘Comply or Explain’ basis. recognising that one approach does not necessarily suit all companies. It takes into account that an alternative to complying with a Provision may be beneficial or necessary for the company in particular circumstances based on a range of factors, including the size, complexity, geography, and ownership structure of a company.  

The ‘Comply or Explain’ regime offers flexibility, and it encourages companies to choose bespoke governance arrangements most suitable to their particular circumstances in both the short and long-term. When departing from the Code companies should explain how their chosen alternative arrangement is more appropriate and beneficial in upholding high standards of governance.

Carefully considered corporate governance policies and practices along with high levels of transparency can lead to improved levels of trust. This will allow investors and other stakeholders to take a more measured view of the governance and reporting of the company.

Key Changes in the 2024 UK Corporate Governance Code

1. Outcomes-Based Reporting

The revised code emphasizes a shift towards outcomes-based reporting, where companies are required to focus on the impact of board decisions on their strategy and objectives, rather than solely on process-driven compliance.

2. Embedding Corporate Culture

The 2024 code places greater emphasis on the board's role in monitoring the implementation and integration of the company's desired culture throughout the organization.

3. Effective Internal Controls

One of the most significant changes is the upcoming requirement for an annual board declaration on the effectiveness of the company's material internal controls, including financial, operational, reporting, and compliance controls.

Implementation Steps for the Internal Controls Requirement

To prepare for the 2026 reporting requirement on internal controls effectiveness, companies should take the following steps:

• Gap Analysis: Assess the current internal control framework and identify areas for improvement.
• Documentation: Ensure proper documentation of control activities and risk management processes.
• Testing and Monitoring: Establish a process for testing the effectiveness of internal controls and regularly monitoring their performance.

Benefits of Robust Internal Controls

Implementing a strong internal controls framework can provide numerous benefits, such as improved risk management, enhanced financial reporting accuracy, and increased investor confidence.  The revised Principle O emphasizes the board’s responsibility not only to establish but also to maintain the effectiveness of the risk management and internal controls framework

Starting from January 1, 2026, boards must provide a description of how they have monitored and reviewed the effectiveness of the internal controls framework annually. They must also declare the effectiveness of the company’s material controls as of the balance sheet date.

Other Key Changes

The 2024 code also introduced new provisions related to malus (reducing or withholding variable pay) and clawback (recovering previously paid variable pay) arrangements for executive remuneration.  These have been introduced to enhance accountability and align executive remuneration with performance and conduct.

In addition, a number of specific requirements for audit committees have been added to the Code.  The Code now includes specific requirements for audit committees, addressing their composition, expertise, and responsibilities, emphasizing their crucial role in financial oversight.

The 2024 updates to the UK Corporate Governance Code have introduced a significant new requirement regarding the reporting on internal controls, which will have important implications for companies and their audit committees. Let's explore these in more detail:

Implications for Companies:

1. Increased Accountability for the Board

The new requirement for the board to provide an annual declaration on the effectiveness of the company's material internal controls places greater accountability on the directors. The board can no longer simply rely on management's assurances but must take a more active role in monitoring and reviewing the internal control framework.

2. Enhanced Scrutiny and Transparency

The detailed reporting on how the board has monitored and reviewed the effectiveness of the internal controls, as well as the specific disclosure of any material control failures, will increase scrutiny and transparency around the company's risk management and control environment.

3. Operational and Financial Impacts

Ensuring the effectiveness of material internal controls across financial, operational, reporting, and compliance domains will require a significant investment of time and resources. Companies may need to enhance their control documentation, testing, and monitoring procedures to be able to provide the required attestations.

4. Reputational Considerations

Any disclosure of material control failures, even with a description of the remedial actions taken, could potentially damage the company's reputation and erode investor confidence. Boards will need to weigh the implications of non-compliance versus the effort required to achieve full compliance.

Implications for Audit Committees:

1. Expanded Responsibilities

The new code provisions place additional responsibilities on the audit committee to oversee the company's internal control framework and provide assurance to the board on its effectiveness.

2. Increased Focus on Internal Controls

Audit committees will need to dedicate more time and resources to understanding the design, implementation, and operating effectiveness of the company's internal controls. This may involve working closely with the internal audit function and other control owners.

3. Requirement for Specialized Expertise

The code now includes specific requirements for audit committee members to have recent and relevant financial experience, as well as an understanding of the company's business, industry, and internal control environment. This raises the bar for audit committee composition and competence.

4. Risk of Liability

With the increased focus on internal controls, audit committee members may face heightened liability if material control failures occur and are not adequately addressed. This could lead to a greater emphasis on professional indemnity insurance and the need for specialized training.

In summary, the new internal controls reporting requirement introduced in the 2024 UK Corporate Governance Code will have significant implications for both companies and their audit committees, requiring increased accountability, transparency, operational changes, and a heightened focus on risk management and control effectiveness.

Conclusion

The 2024 updates to the UK Corporate Governance Code represent a significant step towards fostering better corporate governance practices in the UK. Companies must carefully consider these changes and implement robust governance frameworks to ensure compliance, maintain investor confidence, and uphold the principles of transparency, accountability, and stewardship.

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