On 24 May 2023, the FRC published a consultation paper on changes to the UK Corporate Governance Code.  The proposed changes form part of the implementation of the reforms outlined by the government following its consultation on audit and governance reform.  We are still waiting for the government to introduce legislation to take forward many aspects of the reform, including the creation of the ARGA as the successor regulator to the FRC.  However in the interim the FRC is consulting on the changes within its scope of activity, in anticipation of the legislation being published.

Whilst the main focus of the changes is section 4 of the Governance Code in relation to audit, risk and internal controls, reflecting the fundamental changes to the reporting landscape which the government intends to implement, certain changes to section 5 (Remuneration) are also proposed.

The proposed changes to the remuneration provisions are aimed at ensuring that remuneration outcomes are more strongly linked to performance.  As part of this, increased disclosures in the annual report on malus and clawback provisions would be required to provide greater transparency for investors on the mechanics for executive remuneration (which goes further than the guidance currently set out in the Investment Association Principles of Remuneration). It is also proposed that there should be more emphasis on ensuring that senior executive pay decisions are made with the overall workforce pay in mind, and the increasing use of ESG metrics in bonus and LTIP arrangements is acknowledged.