Companies need to get into gear

The recent publication of the QCA’s corporate governance code was brought about by people from all parts of the small and mid-size company community working together to create a guide that reflects good practice, rather than something that companies can get just away with. Investors, companies and intermediaries all played their part in designing the QCA Code.

Accompanied by a change in the rules for the AIM market, that require companies to tell investors which governance code they have chosen to adopt, the new code is helping boards to examine their approach to governance and see it as a way to drive value creation.

The QCA’s recent Corporate Governance Forum brought together over 80 small and mid-size quoted companies, along with investors and other key figures from the industry.

At the event, it was highlighted that greater focus from government and policymakers on how companies conduct themselves, and the role they play in society, has meant that businesses need to increasingly consider a wide range of stakeholder interests.

For small and mid-sized companies, stakeholder engagement may be something quite new. Typically, smaller companies focus in the short-term on growing their business, and then mature into the role of being important participants in wider society. Stakeholder engagement is a positive process that companies need to embrace and think about as part of their governance. Be it thinking about employees, the supply chain, the local communities in which they operate, or the environment.

The importance and value of board diversity in all its forms was also championed at the Forum. A range of studies indicate that more diverse boards make better decisions that enhance a company’s performance and that small and mid-size quoted companies willing to import the broadest range of skills and experience into their boards can reap the benefits.

Investors told us that while corporate governance is not necessarily always their first immediate concern when looking at a potential investment, poor governance generally results in a poor investment.

Small and mid-size companies should see implementing good corporate governance as a core element to building a sustainable, long-term focused business. Companies which view corporate governance as a burden are probably not doing it right.

Other speakers discussed how hiring an investor relations specialist can be an effective way for companies to build and enhance their stakeholder engagement capacity – an area which often needs development for smaller quoted companies. MiFID II’s impact on the availability of investment research means that quoted companies need to use the process of making the disclosures in adopting the QCA Code as a way to tell their own unique story to investors.

A key question companies asked investors at the Forum was how do they do their investment assessments? In particular, do they read annual reports? The answer was yes and no.

Some seldom read annual reports as the document is out of date by the time it has been finalised.

However, the information in reports is valuable in terms of containing important information in one place at a certain point in time. Analysts do certainly read the corporate governance content of a company’s annual report in full – including the chair’s statement.

For me, 2018 is proving to be a welcome period of focus on corporate governance for small and mid-size companies. It’s a subject I will return to. Companies are increasingly looking at how they are structured and what they can do better.

Some of this is being driven by regulation such as AIM rule changes, but much of it comes from the desire of these companies to pursue excellence in this area and look at the running of the company as a means to drive added value for their business and their community.