Corporate Governance is not an option

'‹'‹Corporate governance is the system by which companies are directed and controlled.

Tim Ward, Chief Executive of the QCA

It​ ​relates to what the board of a company does, how it behaves and the values that a company​ ​shares. It is distinct from the day-to-day operational management of a company by full time​ ​executives.

Depending on the size and circumstances of a company, corporate governance may need to​ ​be in​ ​line with a recognised corporate governance code, adopting a set of specific rules or​ ​principles. For example, companies listed on the Main Market of the London Stock​ ​Exchange are required to follow the Financial Reporting Council​'s UK Corporate

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Governance Code.

Now, in a recent development, London Stock Exchange has announced that all AIM​ ​companies will be required to apply a recognised corporate governance code from​ ​September. Previously this had been something that was entirely voluntary for the 900​ plus ​​companies on AIM. These companies have had the option of stating they did not follow a​ ​corporate code, setting out their own arrangements on their website. The new rules mean​ ​that this is no longer allowed.

But what corporate governance codes can AIM companies follow?

Most small and mid-size companies find that the UK Corporate Governance Code is​ ​unsuitable for their size and stage of development. QCA research has found that around half

of AIM companies therefore currently choose to adopt the QCA Corporate Governance​ ​Code.

Since its initial release in 2013, the QCA Corporate Governance Code has been tailored to​ ​meet the needs of small and mid-size quoted firms. As well as being adopted by a​ ​substantial number of AIM companies, it is also used by privately-owned companies.

Of the remaining companies on AIM that do not currently refer to the QCA Corporate​ ​Governance Code, many issue ​"​boilerplate​" ​statements saying that they do not follow a code​ ​due to their size and stage of development. This practice will not be allowed from September​ ​2018.

Some other AIM companies state that they follow aspects of the UK Corporate​ ​Governance Code, a small number follow the corporate governance code of their home

country (where it is not the UK), and others follow a code that is specific for their sector.

Choosing the right code to adopt is important for a business. Good corporate governance​ ​creates shareholder value by improving performance, whilst reducing or mitigating the risks​ ​a company faces as it seeks to create sustainable growth over the medium to long-term.

Companies join public markets to access capital, to benefit from the kite mark of​ ​​being a well-regulated, transparent, communicative and financially sound organisation - this

encourages trust. Without trust, there will be no appetite from shareholders to invest further​ ​or remain shareholders. As the risk is reduced, so the cost of capital is reduced.

And according to a recent YouGov survey the QCA carried out with stockbrokers Peel Hunt,​ ​we learn that investors see good corporate governance as a positive benefit for a company.

But a flexible approach is required. As ​one investor remarked​:​ “I think it’s getting better. In the last two or three years I think it’s improved quite a bit. How​ ​do you get it better? I suppose greater engagement with shareholders. We’re seeing more​ ​companies, more willing to engage on corporate governance issues than five years ago. So,​ ​more of the same I’d say.”

​Another said: ​“You’re always going to have some bad apples but I think generally, corporate governance is​ ​pretty good actually. The thing with small companies as well, they can’t be affording​ ​expensive and complicated board structures because they need to get on with the day job​ ​and hope that creating value sells.”

Later this month an updated edition of the QCA Corporate Governance Code will be​ ​released. It describes what makes for good corporate governance, the 10 corporate​ ​governance principles to follow, and provides step-by- step guidance on how to effectively​ ​apply the principles.

Good corporate governance is not an option. Institutional and private investors need to be​ ​able to invest confidently. Improving the quality of corporate governance will bring real​ ​benefits to AIM-listed companies and to the integrity of the AIM market as a whole.