Principal changes in the 2024 Code

Board Leadership and Company Purpose

• New Principle C provides that ‘[g]overnance reporting should focus on board decisions and outcomes in the context of the company’s strategy and objectives. When deviating from the Code, clear explanations are required.
• Provision 2 of this section has been amended so that in future boards should not only assess and monitor culture but ensure it is effectively embedded. The guidance states that ‘[e]mpowered middle managers are key to the successful embedding’ and ‘boards should seek periodic assurance from management that it has effectively embedded’ culture and values, this includes asking specific questions to evaluate the company’s culture.

Diversity and inclusion

• Amended Principle J (Composition, Succession and Evaluation) promotes diversity, inclusion and equal opportunity, without referencing specific groups.
• Provision 23 has been amended to take account of those companies that may have initiatives than a diversity and inclusion policy when seeking to support the development of diversity and inclusion within the organisation. Annual reports should describe the company’s diversity and inclusion policies, initiatives, objectives, implementation, and progress. This allows for a broader range of initiatives beyond formal policies.

Risk and control framework

• Amended Principle O (Audit, Risk and Internal Control): In addition to establishing risk management and control framework arrangements, the board is responsible for maintaining their effectiveness. Provisions 25 and 26 have been updated to reflect the Minimum Standard.
• New Provision 29 underlines that boards should monitor and review the effectiveness of these frameworks annually, reporting on any material control issues and actions taken to address them.

The company’s annual report must describe the board’s monitoring and review of the framework detail, any material controls and actions taken or planned to improve them, address previously reported issues, and include a declaration of the effectiveness of material controls.

Paragraph 259 of the guidance emphasises that ‘the existence of a risk management and internal control framework does not, on its own, signal the effective management of risk. Effective monitoring and review are essential components of an effective risk management and internal control framework’.

The guidance includes extensive commentary as to what is expected of a board when it seeks to comply with the requirements set out in Section 4 of the 2024 Code.

Directors’ rewards - clawback and malus

• Amended Provision 37:  Directors’ contracts must include malus and clawback provisions to recover or withhold remuneration or share awards under specific circumstances and include details of the circumstances in which they would be triggered.
• New Provision 38: Annual reports should detail these provisions, including their application and rationale, and explain any instances where they were used in the last reporting period.

The Guidance

The guidance includes examples of good practice to support directors and their advisors when applying the 2024 Code. The guidance is not mandatory but can help inform decision-making and ensure compliance with the new Code provisions.

Implementation Timeline

Most changes take effect from January 1, 2025, except for Provision 29, which is effective from January 1, 2026. This phased approach allows for boards to adapt and implement the new requirements effectively.

In summary:

The changes were signalled widely before their formal adoption into the Code, so there are few surprises for firms. However, observers have noted that the changes will result in significant additional responsibilities for boards with new monitoring and reporting obligations. For example, it will be for the board to decide what are “material” controls when it monitors the performance of the risk framework. Others have commented on the malus and clawback requirements, noting that experience in the financial services sector (where similar provisions have been a feature for some time) proved challenging, particularly where companies propose to employ key personnel from outside the UK.