Background: mandatory adoption of a recognised governance code and the wider corporate governance agenda
From 28 September 2018 every AIM company will be required, as part of its Rule 26 disclosures, to state on its website which recognised corporate governance code the board of directors has decided to apply and to explain how the AIM company complies with that code. They will also need to provide an explanation of any departures from that code. This will need to be reviewed annually. Many AIM quoted companies currently state that they comply with the UK Corporate Governance Code or QCA Code “so far as appropriate for a company of this size” or something similar, i.e. that they do not comply in full (a qualified compliance statement). Such terminology will no longer be acceptable and substantive disclosure will be expected.
The implementation of this requirement will take effect from 28 September 2018. However, currently all new applicants are required to state which corporate governance code they intend to follow but otherwise have until 28 September 2018 to comply.
Alongside the consultation on the UK Corporate Governance Code (with a new code expected to be published next month) and the updating of the QCA Corporate Governance Code (see below), the amendment to AIM Rule 26 means that all AIM companies must review their corporate governance this summer. There have also been a number of other significant proposed changes in light of the UK Government’s wider corporate governance agenda (which we discuss here) which are likely to apply from financial years commencing on or after 1 January 2019 and which will require additional disclosure by many AIM companies.
Current themes and emerging practices
We have been discussing the approach with a number of our AIM quoted clients and, whilst the approach is necessarily specific to each company, there are a number of general themes and emerging practices that we have been noticing:
- Many AIM quoted companies are taking the opportunity to change what code they are applying. In particular, many companies which previously adopted a qualified compliance statement in relation to the UK Corporate Governance Code are now choosing to adopt the QCA Code instead. They are attracted by the relative simplicity and perceived flexibility of the QCA Code compared to the UK Corporate Governance Code (which is also still under flux whilst the outcomes of the FRC’s recent consultation are awaited). Our experience is that many NOMADs have encouraged the change and, anecdotally, institutional shareholders are supportive too, particularly where there is active consideration of the change. Recent comments by AIM have also encouraged this approach and as a result we expect that, other than the largest AIM companies, the majority of the others will adopt the QCA Code.
- Many clients are actively considering their approach to corporate governance. Rather than simply produce disclosures for the website, boards of directors typically want to consider and discuss whether their overall approaches to governance should be changed in the light of the reforms to the regime, or should simply be improved.
- Even where companies take the view that they are fully compliant with the corporate governance code they have adopted, many will still need to provide detail about the way that they do so, particularly where the code is principles-based (such as the QCA Code).
- It is expected (and accepted) that companies will not comply fully with the corporate governance code they have adopted, but boards will need to justify their approach, including what alternative protections / procedures are being put in place.
Overall, the changes to the corporate governance regime are providing an incentive to AIM quoted companies to revisit their overall approach to corporate governance, which is being welcomed by both directors and investors alike.
The QCA Corporate Governance Code
The Quoted Companies Alliance (QCA) Corporate Governance Code is one of the possible codes AIM companies can choose to apply. It was revised earlier this year.
The Code is constructed around ten broad principles to promote good corporate governance. The principles are fixed around three objectives: delivering growth, maintaining a dynamic management framework, and building trust.
The principles focus on positive engagement between the company and the stakeholders, and demonstrating a commitment to stakeholders of good governance practices of the business. Additionally, there is a focus on ensuring the company has a well-functioning, diverse board and ensuring that directors have up-to date skills and experience to reflect the development of the company.
In order to comply with the Code, the chair of the board must provide a clear explanation of how the Code has been applied in a corporate governance statement published in the company’s annual report and on its website. In circumstances where a company departs from the principles it should provide a well-reasoned explanation to shareholders and other stakeholders for doing so.