Do rules create behavioural change in companies?

Tim Ward, Chief Executive, Quoted Companies Alliance
Tim Ward, Chief Executive, Quoted Companies Alliance
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We all complain about more rules and regulation stifling innovation and generally testing our patience. But are there times when rules can actually contribute to growth?

From 28 September this year, all of the 900+ companies on the AIM market will be subject to a new rule that says they have to adopt a recognised corporate governance code and explain publicly how they meet it.

The big question is will it actually bring about a change in behaviour for these businesses or will it just become another box-ticking exercise?

The organisation that I represent produces the QCA Corporate Governance Code, the most popularly used corporate governance code by the growth companies that make up the AIM market. I am therefore a little biased in my opinion, but I believe firmly that the QCA Code is a force for good.

I believe strongly that good governance should be about creating long term and sustainable value for shareholders. In order to do this a company needs to think about its business model, its other stakeholders, its culture and its board performance. If this isn't

done the company will not be able to deliver in the long-term.

Already we are hearing that adoption of the code has helped to instigate discussions at board level on sensitive issues that previously were denied an airing, or were dealt with on a superficial level.

The QCA Code comprises ten principles which require a number of disclosures, made either on the company website or in the annual report and accounts. Principles include taking into account wider stakeholder and social responsibilities, promoting a culture based on ethical behaviour, and evaluating board performance.

The chair of the board is required to lead the process of examining where the company is on each principle. If the answer is that it has some way to go, that is fine, but the company and the chair need to be honest and outline how the company is going to proceed in getting to the right place.

One of the awkward conversations for smaller companies with the founder still heavily involved in the business is about succession planning. Where a company has been created and led by its founder, broaching the topic of the long-term leadership of the company can be tricky and may be delayed indefinitely.

However, the QCA Code requires an explanation of how the board is dealing with this. Recently I have spoken to a non-executive director at an AIM company that told me how them going through the process of adopting the QCA Code allowed them to examine this subject for the first time in an objective way, driven by the need of public disclosure.

This instigated the process of coming up with a more deliberate plan, where previously it had been only superficially acknowledged.

Another of the principles of the QCA Code describes how a board should embed effective risk management. This can be difficult for companies to do as it needs to describe how the board gets assurances that the risk management and control systems in place are effective.

It is not straightforward and requires a detailed and substantive analysis by the board, and “risk” is difficult to define.

Others have fed back to us that the conversation about the culture of the company is challenging as they can be unsure on how to assess this, how to measure it and what to do to demonstrate that the right culture is in place. A difficult subject but one that needs to be addresses if a company is to optimise its performance.

All of these things lead to conversations taking place and behaviours examined in the leadership of companies; subjects that might otherwise be indefinitely kicked down the road.

The QCA Code requires these to be examined regularly, and so it is not just a matter of doing something once and then forgetting about it.

We will be looking to examining the impact of the rule change and popular adoption of the QCA Code on the AIM market to see how company behaviour changes. Investors tell us that they look forward to being able to more easily compare and contrast companies’ governance through the disclosures and assess corporate culture.

Not all countries have proportionate corporate governance codes that recognise the differences in size of company and where they are on their stage of development - the QCA Code is leading the way on this and we think that is something to celebrate in the UK.

Governance codes should be about helping create shareholder value. Where rules drive good conversations codes add value.

It's early days but many AIM companies seem to be about to have some difficult conversations which will lead to more productivity and value creation. It will be interesting to see what happens next.

Tim Ward is Chief Executive of the Quoted Companies Alliance