AIM companies | Which corporate governance code to follow?

Published on 31st Jul 2018

As discussed in our recent update on corporate governance developments for AIM companies, from 28 September 2018 every AIM company will be required to adopt a recognised corporate governance code and disclose annually how it complies with that code, where it departs from its chosen code, and an explanation of the reasons for doing so.

This will necessitate a departure from current practice for a large number of AIM companies which, previously, have stated in their annual reports that they follow either the UK Corporate Governance Code published by the Financial Reporting Council (FRC Code) or the Quoted Company Alliance Corporate Governance Code (QCA Code) "so far as appropriate for a company of this size". This will no longer be sufficient and AIM companies will now need to provide more substantive disclosures. Therefore, all AIM companies should review the corporate governance standards they currently apply (if any) and determine whether it is the appropriate standard to use in future.

Importance of choosing the most appropriate governance standard

Choosing the right code to follow for your business is important. You should choose the one that gives you the correct structure and adaptability to ensure you can continue to run your business in the most efficient way possible. Due to the new 'comply or explain' rule, AIM companies will be wary of adopting a code which does not reflect the requirements of their business or industry, as this will lead to disclosure of negative statements which, in turn, may, inadvertently, give activist shareholders ammunition to question the board's commitment to corporate governance.

Which code?

While there is no prescribed list of recognised corporate governance codes, AIM Regulation refers to the FRC Code and the QCA Code as established benchmarks for AIM companies, indicating that these two codes would be accepted as being appropriate for AIM companies to follow. It is for this reason that this article compares the FRC Code and the QCA Code. However, it may be that a different corporate governance standard is more suitable to your business, including, where your AIM company is incorporated overseas, a standard from your home jurisdiction.

Comparing the FRC Code and the QCA Code

In compiling the below (high-level and non-exhaustive) analysis we have compared the FRC Code published in July 2018 which applies to accounting periods beginning on or after 1 January 2019, with the QCA Code which was issued in April 2018. In certain areas, the FRC Code has more lenient requirements for AIM companies. We have used these more lenient requirements in the table below.

Current usage on AIM

The QCA Code is followed by substantially more AIM companies than the FRC Code. According to research undertaken by the QCA in early 2018, over 400 of the 900+ AIM companies currently apply or refer to the QCA Code, with a "significant proportion" stating that they do not follow any code due to their size and stage of development. The FRC Code is more prevalent on the Main Market; indeed it is mandatory for those companies with a premium listing.

Approach taken

The QCA Code is often seen to be easier for smaller and mid-size quoted companies (i.e. those on AIM) to follow, while the FRC Code represents the gold standard of corporate governance.

The FRC Code and the QCA Code take different approaches to corporate governance. The QCA Code is centred on 10 broad principles (albeit accompanied by what these principles entail in practice) obliging those that follow its provisions to adopt a more purposive approach to its interpretation. By contrast, the FRC Code is more prescriptive and lays down more exacting requirements in its 18 principles and 41 provisions.

This makes a direct comparison between the two codes challenging; however, certain themes emerge from both codes, which we discuss below.

Theme FRC Code QCA Code
Board and committee composition

The board should appoint audit, nomination and remuneration committees, each having specific membership and independence requirements.

Remuneration and audit committees should have at least two independent non-executive directors serving on them.

The board should be a well-functioning, balanced team led by the chair and be supported by committees that have the necessary and up-to-date experience, skills and capabilities.
Appointment of directors

Appointments to the board should be subject to a formal, rigorous and transparent procedure.

When making directorship appointments, the board should take into account other demands on director's time. Prior to appointment, significant commitments should be disclosed with an indication of the time involved. Additional external appointments should not be undertaken without prior approval of the board.

Directors must be able to commit sufficient time necessary to fulfil their roles and extra time for major transactions or crises.
Re-election of directors

All directors should be subject to annual re-election.

The chair should not remain in post beyond nine years from the date of their first appointment to the board.

It is healthy for membership of the board to be periodically refreshed. No member of the board should become indispensable.

The chair should be independent when appointed, the roles of chair and chief executive should not be jointly held. Normally, it would not be considered appropriate for the chief executive to become chair.

At least half the board, excluding the chair, should be independent non-executive directors in accordance with strict independence requirements.

The board should have an appropriate balance between executive and non-executive directors and should have, at least, two non-executive directors. Independence is a board judgement
Senior Independent Director (SID) The board should appoint one of the independent non-executive directors to be the SID, to provide a sounding board for the chair and serve as an intermediary for the other directors and shareholders. Companies should consider whether it is appropriate to appoint a SID.
Evaluation of board performance The board should undertake a formal and rigorous annual review of its own performance, as well as that or its committees and directors. The chair should consider having a regular external board evaluation. The board performance review may be carried out internally or externally, but there is no mandatory period for how often such a review should take place.
Interaction with employees

As part of understanding the views of the company's key stakeholders, the company should engage with its workforce through either appointing a director from the workforce, incorporating a workforce advisory panel or designating a non-executive director to liaise with the workforce.

The company is also required to explain in its annual report how it has engaged with employees and how their interests and the matters set out in Section 172 of the Companies Act 2006 influenced board decision-making.

The board needs to identify the company's stakeholders (including employees) and understand their needs, interests and expectations.
The company should explain how it obtains feedback from employees and the actions that have been generated as a result of such feedback.
Responsibility to shareholders The board should generate value for shareholders. They should seek engagement and participation with shareholders on significant matters related to their areas of responsibility. The board should deliver medium to long-term value for shareholders. They should manage shareholders' expectations and should seek to understand shareholders' needs and the motivations behind voting decisions.

Shareholder votes


Instances where 20 per cent. or more of votes are cast against a board recommendation must be registered on the public register maintained by the Investment Association, and commented on by the company when announcing the results of the shareholder vote. The updated views of shareholders should be sought within six months of the shareholder vote. Same as for the FRC Code, but the QCA Code does not require updated views to be taken from shareholders within six months of the vote.

The remuneration committee should review workforce remuneration, related policies and the alignment of incentives and rewards with culture. It should consider these when setting the policy for executive remuneration.

Remuneration schemes should promote long-term shareholdings by executive directors that support alignment with long-term shareholder interest. Share awards granted for this purpose should be released for sale on a phased basis and be subject to a total vesting and holding period of five years or more.

When determining executive director remuneration policy and practices, the remuneration committee should address clarity, simplicity, risk, predictability, proportionality and alignment to culture. The annual report should include a description of the remuneration committee's work, which shows how it has addressed these concepts in setting remuneration levels.

Remuneration policy should ensure that it encourages and rewards the right behaviours, values and culture. Any risk it creates should be acceptable to the remuneration committee, be within the risk appetite of the board, and respect the strategy in place.
Viability statement Taking into account the company’s current position and principal risks, the directors should explain in the annual report how they have assessed the company’s prospects, over what period and why that period is appropriate. The directors should state whether they have a reasonable expectation that the company will continue to operate and meet its liabilities as they fall due over this period, drawing attention to any qualifications or assumptions as necessary. Not applicable.

Osborne Clarke Comment

There are no hard and fast rules which dictate the correct corporate governance code to follow (indeed it may be that the most appropriate code is different to the ones discussed in this article). What is important is that each AIM company takes a diligent and serious approach towards corporate governance, adopts and applies standards which work for it, and understands (and reports on) where it is appropriate for it to deviate from such standards.

UK AIM companies should also be aware of other significant changes to reporting requirements under the UK government’s wider corporate governance agenda which will apply to financial years commencing on or after 1 January 2019. These will require additional disclosures by many UK AIM companies in their annual reports and accounts, irrespective of which corporate governance code the AIM company has chosen. The specific additional disclosures required will depend upon the size of the company but include:

  • a "section 172(1) statement" describing how the directors have had regard to the interests of stakeholders in discharging their duty to promote the success of the company;
  • an employee engagement statement describing the action that has been taken to inform and consult with employees; and
  • disclosures summarising how directors have had regard to the need to foster business relationships with customers, suppliers and others, and its effect on the company's decision-making.

Further information on these changes is available here.

Please get in contact with one of our experts should you wish to discuss the appropriate corporate governance code for your business or any other aspect of corporate governance.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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