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Corporate Governance: Key legal developments

Picture of Amy Lapsevska

By Amy Lapsevska, Hannah Sellick

3 Nov 2022 | 2 minute read

Here's our latest corporate governance update.  

Climate related disclosures

On 6 April 2022, new regulations came into force which amended the Companies Act 2006 (and the Limited Liabilities (Application of Companies Act 2006), as applicable. It is now mandatory for quoted companies, large private companies and LLPs with accounting periods beginning on or after 6 April 2022 to make climate related disclosures ("TCFD reporting") in their annual report. This is in addition to meeting any required reporting requirements under the UK Corporate Governance Code.

What should the disclosures include?

  • Governance: how climate change is addressed in corporate governance.
  • Strategy: the impacts on strategy.
  • Risk management: how climate-related risks and opportunities are managed.
  • Metrics and Targets: the performance measures and targets applied in managing these issues. 

Some entities may wish to distinguish between 'physical' climate risks, such as the impact of increased frequency of extreme weather events, and 'transition' risks – i.e. risks associated with moving towards a net zero economy, for example increased capital expenditure on new technologies and wasted expenditure on redundant/inefficient assets/resources.

Which entities does this apply to?

  • All UK companies that are currently required to produce a non-financial information statement – i.e. UK companies that have more than 500 employees and either have transferrable securities admitting to trading on a UK regulated market or are banking companies or insurance companies.
  • UK registered companies with securities admitted to AIM with more than 500 employees.
  • Other UK registered companies which have more than 500 employees and a turnover of more than £500m.
  • Large LLPs, which are not traded or banking LLPs, and have more than 500 employees and a turnover of more than £500m.
  • Traded or banking LLPs which have more than 500 employees.

Why are these disclosures important?

The objective behind the disclosures is ultimately to inform investment decisions and to provide information to lenders and insurance underwriters about the entity’s climate-related financial risk.

If the business chooses to provide additional information beyond the TCFD reporting requirements, this may be outside the annual report and accounts and may also be signposted within the annual report and accounts. Directors are responsible for the information disclosed in the annual report and accounts, including TCFD reporting.

Implications for businesses going forward

Although not directly affecting businesses that fall outside the TFCD reporting requirements, now may be a good time for all businesses to consider whether:

  • There is a need to deepen engagement with climate-related issues affecting the wider business.
  • The company can analyse climate-related metrics and analyse data in-house, and whether additional resources are required.
  • The existing strategy and risk management arrangements are satisfactory or if there is an opportunity for mechanisms to be streamlined.

The Government's response to the BEIS Consultation

On 31 May 2022, the government published its response to the "Restoring trust in audit and corporate governance" consultation paper, which followed on from several corporate scandals resulting in the ultimate collapse of the likes of BHS and Thomas Cook Group plc.

What are the likely reforms?

Broadly, the government have proposed several reforms, including:

The definition of public interest entities (“PIE”) is to be expanded so that large businesses of public importance would be subject to regulation regardless of whether they are admitted to trading on a regulated market.

The FRC will consult on updating the UK Corporate Governance Code (“The Code”) to include an explicit directors’ statement about the effectiveness of a company’s internal controls and in relation to malus and clawback on executive director remuneration.

The FRC will become the Audit, Reporting and Governance Authority (“ARGA”), which is expected to be established by 2023. It will be responsible for monitoring and enforcing corporate reporting obligations.

Broadly, the government have proposed several reforms, including:

The definition of public interest entities (“PIE”) is to be expanded so that large businesses of public importance would be subject to regulation regardless of whether they are admitted to trading on a regulated market.

The FRC will consult on updating the UK Corporate Governance Code (“The Code”) to include an explicit directors’ statement about the effectiveness of a company’s internal controls and in relation to malus and clawback on executive director remuneration.

The FRC will become the Audit, Reporting and Governance Authority (“ARGA”), which is expected to be established by 2023. It will be responsible for monitoring and enforcing corporate reporting obligations.

Further guidance is awaited to see how this can be developed to be more transparent and rigorous, and yet flexible to meet individual business needs.

What are the implications?

Although the focus of this development is on PIEs, directors/members should consider the governance of large private subsidiaries and potential impacts on the group with voluntary corporate governance principles for large private companies and the parent companies to ensure good practice.

Voluntary Code of Conduct for Directors

On 22 June 2022, The Institute of Directors ("IOD") published a policy paper, "A voluntary code of conduct for directors" calling for the government to commission the development of a code of conduct for all UK companies in an effort to set standards and minimise the risk of further business harm. Rather than a heavily regulated framework, which is sometimes viewed as counterproductive for the board taking away time and innovation, the IOD wish to adopt a flexible approach, concentrating on individual responsibility to achieve business-led solutions.

Register of beneficial owners of overseas entities

On 1 August, the Economic Crime (Transparency and Enforcement) Act 2022 (“ECA”) came into force. Overseas entities (a company, partnership or other entity that is a legal person under its governing law) governed by the law of a country or territory outside the UK that acquire property must now apply for entry on the register at Companies House (the “Register”).

This effectively means that in order for overseas entities to be registered as the legal owners of the land at the Land Registry, the entity will firstly need to be registered on the Register. This is a further attempt to increase transparency by recognising foreign ownership and to reduce economic crime.

Economic Crime and Corporate Transparency Bill 2022 (the "ECCTB")

On 22 September 2022, the ECCTB was published in an attempt to prevent the abuse of UK corporate structures and tackle economic crime. The Bill provides for:

  • Reformation of the role of Companies House to expand the Registrar’s investigation and enforcement powers and introduce identity verification measures for company directors, PSCs and those delivering documents to the Registrar.
  • Increased registration and transparency requirements for limited partnerships.
  • Amendments to the register of overseas entities to provide clarification on e.g. what information is delivered.

On the horizon… diversity in the boardroom

In February 2022, FTSE Women Leaders Review included the following recommendations to be achieved by December 2025:

  • An increased voluntary target for FTSE 350 Boards and for FTSE 350 leadership teams to a minimum of 40% women.
  • FTSE 350 companies and the largest 50 private companies in the UK by sales to have at least one woman in the chair or senior independent director role on the board, and/or one woman in the CEO or finance director role in the company.

In addition, the Parker Review recommended that each FTSE 250 company should have at least one director of colour by December 2024.

Directors/members should take pro-active steps to ensure existing appointment procedures and succession plans promote diversity of gender, social and ethnic backgrounds.

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