A new corporate governance code will beef up the role of audit committees in supervising ESG reporting, as well as attempt to bolster internal controls.

The news comes as the UK’s governance watchdog, the Financial Reporting Council (FRC), this week launched a long awaited review of the governance code, the first big review since 2018.

The code also moves to tackle “overboarding”—where directors hold board positions at too many companies.

Most of the changes have been under discussion since a government white paper launched in 2021 looking at audit reform, following the collapse of Carillion three years before.

The review will cap what many will see as a disappointing journey for the reform of internal controls, after they argued that the government should introduce new laws along the lines of the US Sarbanes-Oxley rules which require board members to sign off internal controls plans.

The new proposals say boards “should establish and maintain an effective risk management and internal control framework…”. The provision will be subject to the “comply or explain” principle, an obligation that carries much less force than writing responsibilities into law.

Other new provisions in the code say audit committees should be “monitoring the integrity of narrative reporting, including sustainability matters, and reviewing any significant judgements”.

New “minimum” standards for audit committees were released this week. The code emphasises the need for audit committee members to follow the standards and to consult with “shareholders and other stakeholders” on the role of the committee and the work of auditors.

Too many boards

Elsewhere, the code says annual performance reviews should consider “each director’s commitment to other organisations, and their ability to discharge their responsibilities effectively”. The measure places directors with many board roles in their portfolio under a spotlight.

The code introduces more emphatic language about board reviews. Rather than asking company chairs to “consider” having a regular review, the new code says: “The chair should commission a regular externally facilitated board performance review.”

Sir Jon Thompson, chief executive of the FRC, said: “Enhancing the corporate governance code will meet the needs of all corporate stakeholders, including investors, employees and suppliers, and boost the resilience of the UK economy, ensuring it continues to attract talent and investment.”

Peter van Veen, ICAEW director of corporate governance and stewardship, said: “This is an important step in strengthening trust and confidence in UK business. The code is the cornerstone of good governance and is seen as a benchmark globally.”

The code has to achieve a “difficult balancing act”, according to Peter Swabey, director of policy and research at the Chartered Governance Institute.

“Good governance helps boards to make good decisions and deliver sustainable businesses,” he said.

Reform has been a long time coming since the government’s white paper. A review of the code is another step along the way to completion.