"One size fits all" rule inhibits smaller firms


A corporate governance code is a set of standards or principles that promote good practice in relation to how companies are run and structured.
This can cover what information companies communicate to shareholders and stakeholders, who is on the board of directors and what they do, how risks are identified and managed, and how executive remuneration is decided within the company.
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Hide AdOf the 900+ companies on the AIM market, around 90 per cent chose to adopt the QCA Corporate Governance Code (the QCA Code) which our organisation produces. It is a rare occasion that so many companies in one country adopt a governance code at the same time and we wanted to investigate what these companies thought about the process and how it might have helped (or hindered) them.
As a result, earlier this year we commissioned YouGov to go out to those companies on AIM and find the answers.
The results give a positive endorsement for the AIM rule change. 39 per cent report that the process of adopting a corporate governance code has helped their business. They cite how
it has helped formalise new processes, encouraged their board to consider new points of view and made it easier for investors to assess them.
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Hide AdSimilarly, we have seen positive outcomes for investors in smaller quoted companies. 40 per cent of companies now disclose more information to the market as a result of adopting the QCA Code. This includes how they evaluate their board, what their strategy and business model is, what sustainability measures they take, and the diversity of their board.
Good corporate governance codes maintain a delicate balance between promoting and requiring specific outcomes, whilst not forcing all companies to do so in the same way.
This is because one-size-fits-all requirements inhibit innovation in new companies who have their unique way of operating successfully. Secondly there is a vast difference in size between the largest companies in the FTSE 100 and the smaller companies at the other end of the market. In Q3 2019, the largest company on London Stock Exchange’s Main Market is
£177bn, whilst the median company on AIM has a market value of a fraction of this, at £27m.
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Hide AdPutting the same requirements on these companies without regard to their size takes no account of the vastly different available resources. This damages smaller companies that we all need to grow, create jobs, and be the innovators of the future.
The QCA Code tries to strike this balance and the results of our survey endorse this. The vast majority of growth companies following it describe the process of adopting it as “manageable” and that disclosure its requirements are “just right”. As one company expanded in their survey answers, “We take governance seriously, but we don’t want to be
run by governance.”
The results of this survey confirm to us that we have created a framework that allows smaller companies, with less resources, to communicate their governance arrangements effectively.
They can do this without being overly burdened with one-size-fits-all prescriptive requirements. This has saved smaller companies precious time and resources that can be dedicated to growth - creating jobs and wealth in the UK and around the world, whilst allowing them to tell their story in a way that suits them.