QCA research report on corporate governance on AIM

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The Quoted Companies Alliance (QCA) has published a research report about corporate governance on AIM.

The report shows that the introduction of the requirement for AIM companies to adopt a corporate governance code has had a positive impact on both companies and investors, improving the perception and integrity of small-cap markets in the UK.

In September 2018 the AIM Rules for Companies were changed to include a requirement that an AIM company must disclose details of the recognised corporate governance code which the directors had decided to apply. According to the QCA report, almost a third of AIM companies were not following a corporate governance code before the rule change.

The AIM Rules are not prescriptive about the code which companies must apply, leaving it up to them to decide which is the most appropriate for their own size, stage of development and objectives. But the research report shows that one year on from the rule change, 89% of the 927 companies on AIM had chosen to follow the QCA Corporate Governance Code (QCA Code). Of the remaining companies, 10% were applying the FRC's UK Corporate Governance Code (FRC Code) and 1% were following a mix of codes.

The QCA Code

The QCA Code was developed to provide smaller, younger companies with a more flexible framework compared to the FRC Code. The FRC Code is primarily aimed at the larger listed companies on the UK's Main Market and following its requirements could place an overly onerous burden on AIM companies, distracting them from their key objective of growth.

The QCA Code is less prescriptive and more principles based. AIM companies responding to the QCA's research survey appreciated the flexibility of the QCA Code, seeing it as 'enabling' rather than 'policing', giving them the ability to move and grow within the framework.

Companies also reported that applying the QCA Code led to positive changes in behaviour and tangible benefits, rather than simply being a box ticking exercise to show that something had been done. In particular, applying the Code had encouraged good communication, triggered difficult conversations on things such as succession planning and helped to formalise board processes.

Key findings of the QCA research report

The key findings of the research report include:

  • 39% of the companies surveyed said applying the QCA Code had helped their business, particularly by helping formalise new processes, encouraging the board to consider alternative points of view and making it easier for investors to assess them.
  • 40% of companies have disclosed more information as a result of applying the QCA Code, including information about board evaluations, strategy and business models, and sustainability measures.
  • 30% of companies have considered succession planning in more detail due to following the QCA Code.
  • 75% of the companies thought the QCA Code's disclosure requirements were 'just right' and proportionate for smaller companies.

Room for improvement?

Whilst the research report shows that the QCA Code has been broadly welcomed by companies, respondents to the survey requested additional guidance on how to follow the Code in practice.

In addition, there was some concern that the key advantage of the QCA Code - its flexibility - could also be its downfall if this leads to it not being taken seriously. A balance must be struck between keeping the benefits of the flexible framework, whilst ensuring it is not treated as another box ticking exercise.

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