How governance is driving AIM companies to higher standards

Posted in Reporting on 16 December 2019 By James Alexander, Client Director

A year on from the introduction of AIM Rule 26, the positive impact on governance for AIM companies is clear.

The corporate governance landscape has shifted dramatically for AIM companies in the past year. In September 2018, the London Stock Exchange introduced a new requirement under AIM Rule 26 for all companies on AIM to adopt a corporate governance code. A first for the market, it began a new era of transparency, enabling investors to better benchmark companies on governance.

A year on, the Quoted Companies Alliance (QCA) has released a report exploring AIM companies’s views on the change. Of the 927 companies on AIM, 89% have adopted the QCA Corporate Governance Code (the QCA Code). Prior to AIM Rule 26, the majority (68%) already followed a code but for three in 10 (29%) this was a first. Coupled with the new disclosure requirement, this has been a major change for AIM companies, so the insight offered by the QCA’s report is enlightening, particularly with how we can build on the strong foundations.

Not an excessive burden

One of the criticisms often levelled at the growing wave of regulations is that they are onerous and require an undue level of resource – in particular, for the board – taking time away from the running of the business. It was positive to see, therefore, that 81% felt that compliance with the QCA’s Code was manageable in terms of resources.

Given this evidence – and with formal governance requirements beginning to be extended to other areas of UK business (for example, the recent requirement for large private companies) – we can see that good governance, and transparency around it, is accessible and readily achievable for firms outside the Main Market.

Better disclosure leads to better practice

The true aim of requiring companies to follow a governance code is to encourage the better running of the business. It is extremely encouraging to see that nearly 40% believe that adopting their corporate governance code has positively influenced the running of their company. Only 12% felt it had hindered things.

40% of companies are also disclosing more information to the market. While more does not necessarily mean better, it is still a step in the right direction – and it seems to be having an effect, with a fifth believing the Code made it easier for investors to assess them.

More tangible is the impact that 31% felt the Code had on forcing leadership to consider new points of view, while 16% said it has led to closer alignment between leadership and external stakeholder views.

As corporate scandals continue to hit British companies, there has been a renewed focus on getting companies to consider alternative and diverse perspectives. We spoke to Anthony Robinson, Head of Policy & Communications at the QCA, who added “Companies need to take into account wider stakeholder and social responsibilities, and their long-term implications."

Companies need to take into account wider stakeholder and social responsibilities, and their long-term implications – we're seeing increasing pressure from investors for this to be communicated well. It can therefore be an IR opportunity but also be a positive tool for engaging with employees and customers.

Anthony Robinson, Head of Policy & Communications, QCA

The fact that the Code is encouraging more companies in this area is to be celebrated.

As a result of adopting the Code, nearly a third (30%) had also considered succession planning in more detail. A vital area of corporate governance, but one which can fly under the radar until it is needed, strong succession planning directly leads to better long-term and sustainable success. 

Led from the top

“Good corporate governance should be led from the top,” says the QCA’s Anthony Robinson. However, it is often a challenge for governance practitioners to get senior leadership buy in. Good governance practices are sometimes viewed as a pure compliance requirement, for which the benefits are not completely understood. It is encouraging that 82% of respondents found the QCA Code easy to use and to explain to board members. Nearly two-thirds (62%) could also understand how the Code’s principles related to the company’s strategy.

51% said it was the Chair's responsibility to ensure the governance code was implemented

Perhaps most interestingly of all, when asked who has responsibility for ensuring the QCA Code is implemented, 51% responded that it was the Chair’s job, while it was also great to see the CEO responsible for the Code at 12% of companies. For nearly two-thirds, governance is being led by the very top, demonstrating real commitment.

We have seen the impact of AIM Rule 26 in our work at Emperor. Where at times in the past, it could be challenging to get company leadership to engage with governance, we have seen a step change in attitude. Our clients are keener than ever to discuss governance and how they can take both their practices and communication to another level.

Next steps

One year into AIM Rule 26, it is good to see positive sentiment; however, it is important that this is seen as just the first step and companies look to how they can build on this foundation and take their efforts to new heights in the next year and beyond. Just over half of the survey’s respondents have already conducted a review of the impact of adopting a governance code; however, 38% have not, with 11% not planning on doing so. This is a crucial area and should not be ignored.

If a company adopts a corporate governance code for the first time, it should be good practice to review what impact there has been in order to optimise for the future. All companies are different and their governance practices should suit them and their stage of development. This will evolve as the company grows and matures.

Anthony Robinson, Head of Policy & Communications, QCA

It is something Emperor has expertise in – from strategic advisory, to how it is being communicated through the AIM Rule 26 public statement, annual report, website or other channels, we work with clients to make their governance the best it can be, and make sure they are telling their story in the clearest and most effective way possible.

Good governance is a critical area for ambitious growth companies. Rule 26 has pushed companies to act, but basic compliance is not enough if businesses and their stakeholders are to get maximum benefit. The QCA’s report has demonstrated it need not be an onerous workload, that senior leadership are buying into governance and that it can truly benefit the business.

Get in touch at [email protected] to find out more about how Emperor can support AIM companies with governance.

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