Changes in corporate governance codes bring about reforms for AIM and UK-listed companies
News Article: Updates to UK Corporate Governance Codes Impact Different Sized Companies
The Financial Reporting Council (FRC) and the Quoted Companies Alliance (QCA) have recently updated their corporate governance codes, affecting different types of companies across the UK.
The FRC Code, designed for premium-listed and larger public companies, features a more detailed and prescriptive framework. Emphasizing transparency, board effectiveness, risk management, and stakeholder engagement, it has been updated to reflect changes in UK company size thresholds and disclosure requirements from April 2025.
On the other hand, the QCA Code is a proportionate, principles-based governance code tailored mainly for small and mid-sized quoted companies. Covering about 93% of these smaller publicly traded companies, it focuses on scalable governance structures appropriate for their size and complexity. The 2023 update continues to emphasize principles like entrepreneurial leadership, effective risk management, and stakeholder consideration but is less prescriptive than the FRC Code.
The QCA Code suits smaller quoted companies by providing a flexible governance framework that balances good governance with proportionality. In contrast, the FRC Code imposes a more rigorous governance regime for larger or premium-listed entities that require greater transparency and structure.
Some key differences between the codes are the target companies, governance approach, board structure, disclosure standards, and risk and stakeholder focus. The FRC Code requires robust board composition, committees, and controls, while the QCA Code encourages proportionate governance tailored to size. The FRC Code also has stricter and broader disclosure requirements, updated for 2025 size thresholds, compared to the QCA Code, which is suitable for smaller firms with lighter disclosure burdens.
Both codes have been updated at the same time, but it is understood that this is a coincidence. The new edition of the QCA code includes a new principle on remuneration policies and structure. The new 2024 version of the UK Corporate Governance Code strengthens the requirements about the monitoring and review of the company's risk management and internal control framework.
The QCA still does not give metrics for what might constitute independence, but it does say that the board needs to be sensitive to both real and perceived risks to independence. The new 2024 edition of the UK Corporate Governance Code will apply to financial years beginning on or after 1 January 2025, with the exception of new requirements to report annually on the effectiveness of risk management and internal controls, which will apply to financial years beginning on or after 1 January 2026.
The annual report disclosure requirement now includes explaining how the remuneration structure and practice supports the company's purpose, business model, strategy, and culture. Boards must now consider factors such as socio-economic backgrounds, nationality, educational attainment, gender, ethnicity, and age when making decisions and for succession planning.
Environmental, social, and governance (ESG) considerations are crucial for small caps as they look to keep pace with investor expectations and reporting requirements. The annual report must explain the company's climate-related governance and opportunities, its process for identifying, assessing, and managing climate risk, and how these processes are integrated into its overall risk management.
The new edition of the QCA code retains 10 principles, though they have been substantially moved around and each has been updated. Companies must now produce quantitative and qualitative reporting in their annual report of environmental and social matters to meet investor needs and expectations.
Larger companies may wish to put their remuneration policies to a binding shareholder vote. The board should provide in the annual report a description of how the board has monitored and reviewed the effectiveness of the framework and a declaration of effectiveness of the material controls as at the balance sheet date. A description should also be provided of any material controls that have not operated effectively as at the balance sheet date, the action taken, or proposed, to improve them, and any action taken to address previously reported issues.
The new concept of a company's "purpose" has been threaded into the code, and this purpose must now be explained in a company's strategic report. Companies with a controlling shareholder should "consider" protecting minority shareholders with a relationship agreement or similar. The independent non-executive directors (NEDs) should comprise at least half of the board.
In summary, the updates to the UK corporate governance codes impact different types of companies. The FRC Code imposes a more rigorous governance regime for larger or premium-listed entities, while the QCA Code provides a flexible governance framework for smaller quoted companies. The 2025 updates to the FRC Code, including changes to company size thresholds and disclosure rules, mean some companies may shift between codes depending on their size, impacting governance practices accordingly.
- The Financial Reporting Council's (FRC) Code, designed for large businesses and premium-listed companies, has updated its framework to reflect changes in UK company size thresholds and disclosure requirements from April 2025, emphasizing transparency, board effectiveness, risk management, and stakeholder engagement.
- The Quoted Companies Alliance (QCA) Code, tailored mainly for small and mid-sized businesses, continues to provide a flexible governance framework that balances good governance with proportionality, focusing on scalable governance structures appropriate for their size and complexity, encouraging principles like entrepreneurial leadership, effective risk management, and stakeholder consideration.
