Audit committee responsibilities, the invisibility of the “comply or explain” principle and the general cost of compliance all feature among the concerns expressed about proposed changes to the UK Corporate Governance Code.

In what has been the largest response to any Financial Reporting Council (FRC) consultation, hundreds of companies, professional bodies and thinktanks have responded to a consultation that was launched in May this year and closed in September.

The FRC’s team are now sifting through responses, ready to publish the feedback and a finalised code, probably either at the end of the year or early in 2024.

A spokesman says the FRC received “really great challenge and constructive feedback” during the consultation, which involved speaking to more than 5,000 people, webinars, roundtables and meetings, as well as written reaction.

A good deal of the new code throws a spotlight on new responsibilities for audit committees and new internal controls duties.

The FRC proposed making audit committees responsible for “monitoring” narrative reporting, including “sustainability” matters; engaging with shareholders and wider stakeholders; following new minimum standards and promoting “effective competition” among audit firms; and developing an audit and assurance policy.

SOX and the City?

The code asks boards to “maintain an effective risk management and internal control framework”, somewhat similar to the Sarbanes-Oxley (SOX) regime in the US. This will include a “declaration” that risk management and internal controls arrangements have been “effective throughout”.

Not everyone was impressed with the proposals. The Audit Committee Chairs Independent Forum (ACCIF) refuses to support the internal controls measures. While ACCIF says the idea is good in theory, at a “practical level” it is worried about the resource required for implementation.

“In the absence of detailed guidance and worked examples, we are worried that there will be a wide range of interpretation which will lead to comparability challenges between sectors and competitor companies.”

That leads ACCIF to a more general point. “We believe that the cost/benefit argument for the proposed changes to the code has not yet been made.” Members are worried about “significant extra time and cost” needed to address changes in the code.

Nor was ACCIF impressed with putting audit committees in charge of monitoring narrative and sustainability reporting. It’s a stance that has support from elsewhere.

The Institute of Directors (IoD) has, in its own response, said making audit committees exclusively accountable for ESG is a mistake and that boards should be left to assign the task to other bodies, such as a sustainability committee, an ESG committee or the board as a whole if they wish.

Fears for tiers

The Institute for Chartered Accountants in England and Wales (ICAEW) makes a slightly different argument, focused on board dynamics.

“The additional responsibility for audit committees does risk creating a ‘board within a board’ or, at least, a two-tier system within a board where those on the audit committee will have significantly more responsibility that other non-executive directors.

“This may have unintended consequences—including discouraging high-quality applicants for membership of audit committees.”

Not everyone sees an expanded role of audit committees as a bad idea. ShareAction , a shareholder advisory body, says: “This newly expanded role for the audit committee of monitoring the integrity of narrative reporting is a step in the right direction towards more consistent and comparable data.

“However, effective reporting needs to address how sustainability issues will be built into the overall strategy, not just that the issues have been considered.”

The ICAEW also worries about the general workload implied by changes to the code. The institute notes that “full compliance” according to an FRC report from November last year, is sliding downward.

“Many of the proposed changes to the code,” writes the ICAEW, “will not be straightforward to report on and will require substantial additional work and disclosures.

“This is likely to further reduce compliance with the code to a point at which full compliance risks no longer being seen as achievable, or even desirable, by a significant percentage of companies.”

However, the code is offered on a “comply or explain” basis, a fact that may have been forgotten, according to some respondents.

UKFinance, a professional body for banks, reveals concerns that organisations have forgotten that “explaining” why they haven’t complied with the code is a legitimate response.

“We believe that the concept of ‘comply or explain’ is fundamental to the code’s success and that the FRC should use this revision of the code to strongly reinforce that an insightful disclosure of the reasons for not providing a code disclosure can be a better option.”

TheCityUK, an industry body for finance professionals, says: “The code could be explicit that an explanation for non-compliance is not a failure of governance, and reinforce the viability of the ‘explain’ option with proxy advisers to avoid a harmful ‘box-ticking’ approach to compliance.”

The FRC continues to work through consultation responses. There is much to take on board. Nevertheless, the code will change, and the governance landscape will be remoulded.