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