UK Corporate Governance Regulator Finds More Companies Departing From Code as Reporting Faces Scrutiny

Key Takeaways

• More Companies Departing From the Code: The FRC found that 39 of 100 companies departed from at least one provision of the UK Corporate Governance Code, compared with 25 in the previous year's review.
• Governance Explanations Remain Inconsistent: The regulator found that companies were making use of the Code's flexibility, but many still needed to provide clearer explanations of their governance decisions and the results of board activities.
• Internal Controls Preparations Advance: Ninety-two companies reported readiness activities for revised Provision 29, which strengthens board accountability for risk management and internal controls.
• AI Receives Greater Board Attention: Ninety-five companies mentioned artificial intelligence in their reporting, up from 86 the previous year, while 68 considered AI within their risk frameworks.
• Smaller Companies Demonstrate Proportionate Reporting: The FRC found that small-cap companies made slightly greater use of departures while providing examples of concise, effective governance disclosures.

Deep Dive

Thirty-nine of the 100 companies examined by Britain's Financial Reporting Council departed from at least one provision of the UK Corporate Governance Code this year, up from 25 in the previous review. The regulator is less concerned about the increase than it is about the explanations companies give shareholders for their decisions.

This is the first year of reporting against the revised 2024 Code, which places greater emphasis on the outcomes of board decisions and the reasons companies adopt alternative governance arrangements. The review found progress in both areas, although many companies continued to describe their governance activities without adequately explaining what those activities achieved.

The Code operates on a comply or explain basis, allowing companies to depart from individual provisions where their circumstances justify a different approach. The FRC has defended that flexibility against criticism that companies face pressure to comply with every provision regardless of whether it suits their circumstances.

The latest findings offer some evidence that companies are exercising that discretion. Although departures increased from the previous year, the proportion remained broadly consistent with the longer-term pattern of approximately one-third of companies reporting at least one departure.

The FRC identified examples of companies explaining why alternative arrangements were appropriate, what risks those arrangements presented and how the risks were being addressed. Some also made clear whether their departures were temporary. Such explanations were not consistent across the sample.

"Flexibility is a core strength of the UK Corporate Governance Code," said Mark Babington, the FRC's executive director of regulatory standards. "It allows companies to adopt governance arrangements that reflect their individual circumstances while remaining transparent with investors about the choices they have made."

Babington said the number of departures mattered less than whether companies provided investors with clear and convincing explanations of their governance arrangements.

Board Reporting Still Struggles to Demonstrate Results

The FRC found that companies were not consistently explaining the consequences of board decisions, despite the revised Code's greater emphasis on outcomes-based reporting. Annual reports frequently described matters considered by directors, discussions held during board meetings and decisions taken during the year. Many stopped short of explaining what subsequently changed.

The regulator identified stronger examples in reporting on shareholder engagement and board performance reviews, where companies were more likely to connect board activities with identifiable results.

Elsewhere, companies sometimes presented information as an outcome without explaining its significance. The FRC said better reporting should establish a connection between a board's decision or action and the resulting impact.

The distinction matters for shareholders seeking to assess board effectiveness. A description of a performance review establishes that the exercise occurred. An explanation of what directors learned and how they responded provides a more useful account of whether the review influenced governance practices.

The revised Code also emphasizes how companies assess and monitor organizational culture, whether the desired culture is embedded in practice and how board objectives and initiatives relate to corporate strategy.

The FRC's findings suggest that companies have further work to do in moving beyond descriptions of governance procedures toward reporting that demonstrates how those arrangements operate.

Companies Advance Preparations for Internal Controls Requirements

Preparations for revised Provision 29 were widespread among the companies examined. The FRC found that 92 of the 100 companies reported some form of readiness activity ahead of the strengthened requirements for risk management and internal controls.

The revised provision applies to financial years beginning on or after January 1, 2026, and requires boards to make a declaration concerning the effectiveness of material controls, including financial, operational, reporting and compliance controls.

The strongest disclosures described how boards and their committees were identifying material controls, assessing their effectiveness, testing assurance processes and monitoring implementation.

The FRC considered these preparations encouraging, although the next reporting cycle will require companies to move beyond descriptions of readiness work and provide company-specific disclosures supporting their boards' declarations.

The review did not establish whether the preparations undertaken would ultimately result in effective controls. Its findings concerned the extent and quality of the readiness activities companies had disclosed.

Artificial Intelligence Becomes More Prominent in Risk Reporting

Artificial intelligence featured in the reporting of 95 companies, compared with 86 in the previous year's review. Sixty-eight companies considered AI within their risk frameworks.

The FRC also identified increasing board attention to cybersecurity and AI-related risks, reflecting the growing presence of technology issues in corporate governance reporting. The figures demonstrate greater attention to AI in company disclosures, although they do not establish whether the quality of board oversight has improved.

For companies preparing to report under Provision 29, the treatment of technology-related risks within their control frameworks will form part of the broader assessment of how effectively material risks are managed.

Smaller Companies Show That Effective Reporting Need Not Be Lengthy

The FRC included a dedicated assessment of small-cap company reporting for the first time, examining how smaller businesses apply the Code's requirements. These companies showed a slightly higher incidence of departures, particularly from Provisions 9 and 19, which concern the independence and tenure of board chairs.

The regulator nevertheless identified examples of concise, informative reporting among smaller companies, demonstrating that effective disclosures do not necessarily require lengthy explanations or complex reporting structures.

The findings supported the FRC's position that governance arrangements should reflect a company's size, resources and circumstances, provided departures from the Code are properly explained.

The regulator also examined opportunities to simplify annual reporting more broadly. Its work identified unnecessary duplication and repetition, suggesting that companies could improve clarity by placing substantive disclosures in a single location and using more precise cross-references elsewhere.

The review found that reporting quality depended more on clear structure and company-specific explanations than on the volume of information provided.

For the FRC, the immediate priority is improving the substance of those explanations. Companies are already making use of the Code's flexibility, and most of those examined have begun preparing for the revised internal controls requirements. The next test will be whether their annual reports provide shareholders with sufficient evidence to assess the effectiveness of the governance arrangements they describe.

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