Corporate governance key updates | October 2024 – January 2025

On 23 October 2024, the Institute of Directors (the IoD) published its voluntary Code of Conduct for directors, following a widely successful endorsement from most respondents to its June 2024 consultation.

The Code of Conduct aims to provide companies with a “practical tool to help directors make better decisions and maintain public trust in business activities” and structure it around six “Principles of Director Conduct,” each with undertakings specific to the Principle.

The six principles are:

1. Leading by example: This principle requires directors to consider their personal conduct and decision-making and ensure that the directors demonstrate a high level of standard for such behaviours.
2. Integrity: This principle requires directors to consider their actions, ensure that they act in ways that are honest, adhere to strong ethical values and do what is right in the best interest of the business.
3. Transparency: This principle requires directors to provide accurate and consistent information to stakeholders and make decisions openly by explaining the rationale behind them.
4. Accountability: This principle requires directors to be answerable for their decisions and ensure that there is a personal responsibility for all actions and consequences.
5. Fairness: This principle requires directors to treat others with respect and to adopt an inclusive mindset to promote equality throughout the business activities.
6. Responsible business: This principle requires directors to take into account societal and environmental impacts when decision-making and ensure that ethical and sustainable practices are implemented.

As the Code of Conduct is voluntary, there are no formal enforcement procedures in place, as the Code of Conduct does not intend to impose additional compliance obligations or legal or regulatory duties on directors or those in director-equivalent roles.

The IoD plans to review the Code of Conduct periodically to ensure its relevance and effectiveness.

The IoD acknowledges that the role of the director has become more challenging over the years due to the increased pressure to balance competing interests, such as the consideration of the interests of the stakeholders, the maintenance of business ethics and the culture of the business.

Therefore, the implementation of the Code of Conduct highlights a public commitment towards the promotion of a behavioural framework, increased integrity, and establishing public trust in relation to the director’s decision-making practices.

On 11 November 2024, the Financial Reporting Council (the FRC) published a consultation on proposed updates to its UK Stewardship Code 2020.

For background, the Stewardship Code is a voluntary, principles-based code of best practice, which sets out what the FRC considers an appropriate framework for asset owners, asset managers, and service providers to report on and disclose their stewardship responsibilities and activities over a 12-month period.

In 2024, the FRC engaged with over 1,500 stakeholders and reviewed current reporting practices as part of its efforts to update the Stewardship Code. The objectives of the proposed changes are to improve the quality of disclosure and reflect good stewardship practices without introducing unnecessary burdens.

The key proposals in the consultation include:

• A revised and enhanced definition of stewardship. The current definition:  “Stewardship is the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment, and society.” – is proposed to be updated to: “Stewardship is the responsible allocation, management, and oversight of capital to create long-term sustainable value for clients and beneficiaries.“. This change aims to broaden the scope of stewardship by capturing signatories across the investment chain, emphasise the need to create long-term sustainable value for clients and beneficiaries, and support growth and investment.
• A reduced reporting burden to streamline the reporting process, separating policy and activity disclosures. This proposal revision has suggested that the reporting requirements be split into two parts: (i) Policy and Context Disclosure – containing information about a signatory’s organisation, its governance and resourcing, and linking to relevant policies; and (ii) Activities and Outcome Report – signatories will be required to submit a report describing how they have exercised stewardship throughout the year, how they have applied the Principles through their activities and the resulting outcomes.
• Refining the principles for different types of signatories and service providers, including for the first time, a dedicated Principle for proxy advisors. This revision of the Principles will be made through various means, including restructuring each principle, removing context, activity, and outcomes subheadings, and setting clear expectations for different entities. The current Stewardship Code has 12 Principles that apply to asset owners and asset managers and six Principles for service providers with detailed reporting expectations against each Principle.
• New guidance to support effective implementation and help signatories with the transition to the new reporting arrangements.

The FRC has confirmed that it will host a series of engagement events during the consultation period to gather further feedback from stakeholders on the proposals, with the consultation ending on 19 February 2025.

The updated Code is expected to be published later in 2025 for implementation with the first reporting cycle in 2026.

The proposed updates to the Stewardship Code highlight the FRC commitment to ensuring that it remains consistent in efforts to promote clarity and refine the stewardship practices and outcomes to assist effective adoption by businesses.

On 10 December 2024, the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024 were laid before Parliament, together with an Explanatory Memorandum.

This followed the Government’s October 2024 announcement that legislation would be introduced by the end of the year to:

• Increase the turnover and balance sheet criteria for determining company size for reporting purposes;
• Correct aspects of the UK’s audit framework and reporting requirements under the Companies Act 2006 (CA 2006); and
• Remove outdated reporting requirements and obligations from the Directors’ Report.

The Government also stated that the Department for Business and Trade plans to launch a consultation in 2025 to facilitate the simplification and modernisation of the UK’s non-financial reporting framework.

As stated above, one key establishment of the Regulations is that it has raised the financial threshold that determines the size of a company and its reporting obligations by approximately 50% as follows:

The other key establishment made by the Regulations is the removal of the following reporting requirements on the Directors’ Report that either replicate, duplicate, or are superseded by, other existing reporting obligations:

• Information about financial instruments: This provision has been superseded by new requirements in international and UK accounting standards that require such disclosure.
• Information about important events that have occurred since the end of the financial year: This provision has been superseded by accounting standards, which require companies to disclose information about “post balance sheet events.”.
• Information about likely future developments: this provision has been superseded by a requirement in the Strategic Report for companies to provide an annual “fair review” of their business and a “description of principal risks and uncertainties” facing the company.
• Information about research and development: this information is also provided under accounting standards and can be expected to feature in the Strategic Report.
• Information on branches: this reporting obligation and information on a company’s operational footprint are contained in the annual review of its business in the Strategic Report.
• Information about engagement with employees: the provision overlaps with material information about employee matters typically included in the Strategic Report.
• Information about engagement with customers and suppliers: this overlaps with the section 172 statement, which requires directors to explain how they consider customers and suppliers in their decision-making.
• Information relating to the employment of disabled people: This is addressed in greater detail in the anti-discrimination legislation.

The Regulations come into effect on 6 April 2025 and apply to financial years starting on or after 6 April 2025.

It highlights the Government’s focus on implementing standards that streamline reporting requirements to encourage more engagement from businesses and enhance the reliability of corporate disclosures, which in turn fosters transparency and trust in the reporting practices within the UK.

On 18 December 2024, the Financial Reporting Council (FRC), acting as the secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC), published the Committee’s recommendations  to the Secretary of State (SoS) for Business and Trade.

The recommendation proposed the endorsement and adoption of the first two IFRS Sustainability Disclosure Standards (SDSs):

• IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
• IFRS S2 Climate-related Disclosures (S1 and S2).

For background, the Minister of Enterprise, Markets and Small Business commissioned TAC to provide guidance on the endorsement of the use of the ISSB standards in the UK and a review of the IFRS SDSs (published in 2023 by the International Sustainability Standards Board) and their suitability for use in a UK context, following the FRC’s July 2023 Call for Evidence on the use of the ISSB standards in the UK and a review of the IFRS SDS and their suitability for use in a UK context.

TAC’s review was based on six endorsement criteria, including but not limited to whether the use of the IFRS SDSs is likely to: (i) improve the international comparability of sustainability-related reporting in the UK; (ii) support companies in making disclosures that are understandable, relevant, and reliable; and (iii) improve the quality of corporate reporting within the UK in the long term.

TAC’s review of SDSs concluded that the “endorsement of S1 and S2 with its proposed amendments would be conducive to the long-term public good in the UK.”.

The key amendments proposed by TAC are as follows:

• Allow entities providing finance to use an internationally recognised industry classification system (e.g. a classification system used by the entity for other regulatory or financial reporting purposes) instead of the Global Industry Classification Standard (GICS) when reporting on Scopes 1, 2, and 3 gross financed emissions of the entity finances.
• ISSB provides written clarification to acknowledge that the current industry practice of reporting financed emissions using the latest available reliable information for a previous period is not inconsistent with the requirements of IFRS S1 and IFRS S2. In the absence of this written acknowledgement from the ISSB, TAC recommends that the UK Sustainability Disclosure Policy and Implementation Committee consider the need for such an acknowledgement for UK entities and develop guidance on implementing IFRS S1 to clarify how entities can align this standard with existing sustainability-related disclosure requirements under the current UK legal framework to avoid undue cost and effort relating to reporting.
• Remove the transition relief in IFRS S1 that permits delayed reporting in the first year (IFRS S1 paragraph E4) and extend the ‘climate-first’ reporting relief in IFRS S1, which allows entities to delay reporting sustainability-related information, for up to two years.
• Change the effective date of the IFRS SDSs to remove the IFRS’s date, which has now passed, and to rename this section ‘Initial application’.

The amendments to the SDSs have only been recommended if: (i) deemed necessary for the effective application of the IFRS SDS within a UK context; (ii) failure to amend would be of detriment to the long-term public good in the UK; or (iii) they are desirable, to build upon the material provided within the global baseline provided by the IFRS SDS.

It reflects the UK’s commitment to be a global leader in corporate governance as the Government are carefully evaluating global sustainability standards to ensure that they fit into its legal, regulatory, and reporting framework. This ensures that the standards not only align with the international best practices but also support UK companies in providing relevant, reliable, and high-quality sustainability disclosures.