01 October 2018 by Ben Harber and Shaun Zulafqar
Under AIM Rule 26, AIM-listed companies must follow and report on a recognised corporate governance code
The rules on corporate governance for AIM-listed companies changed on 28 September. Unlike companies with premium and standard listings, AIM companies are not required to comply or explain with the UK Corporate Governance Code.
Although many AIM companies choose to apply as much of the code as practicable for a company of their size and stage of development, it is not uniformly applied.
Since 30 March 2018, the London Stock Exchange (LSE) has published a number of updates to the AIM rules. The LSE has recognised the increasing importance placed on smaller quoted companies to follow good corporate governance practices and as a result of the update, from 28 September 2018, under AIM Rule 26, AIM companies will be required to follow a recognised corporate governance code.
Under AIM Rule 26, companies will be required to disclose on their website: details of the corporate governance code that has been applied, how the company complies with that code and any instances where it departs from its chosen corporate governance code.
The company will need to provide an explanation of the reasons for departing from their chosen code. Such information must be reviewed annually and the date of review published on the company’s website under the ‘corporate governance statement’ section.
There is no definitive list of recognised codes from the LSE; however, it has highlighted the UK Corporate Governance Code (UKCGC) and the Quoted Companies Alliance Code (the QCA code) as established benchmarks.
Although the UKCGC is seen as the apex of corporate governance, many small and mid-size AIM-quoted companies may well select the QCA code as a more appropriate code due to their size and stage of development. In addition, there are other recently updated codes where many of the key principles and themes are aligned.
“The focus of the UKCGC and QCA code remains on engagement between the company, shareholders and their stakeholders”
The updated UKCGC was published on 16 July 2018. In the updated version, the number of provisions were reduced by approximately one third, with the code now consisting of 18 principles and 41 provisions. In comparison, the QCA code establishes 10 broad principles and disclosures considered appropriate for small and mid-size quoted companies.
The focus of the UKCGC and QCA code remains on engagement between the company, shareholders and their stakeholders, demonstrating a commitment towards good corporate governance and ensuring the company has a well-functioning and diverse board.
Both codes also highlight the importance of having an appropriate balance between executive and non-executive directors and supporting the board through committees that have the necessary skills and knowledge to discharge their duties and responsibilities effectively.
Our experience shows that many AIM companies have chosen the QCA code as an appropriate point of reference when adopting good corporate governance procedures. According to statistics released by the QCA in early 2018, over 400 of the 900+ AIM companies currently apply or refer to the QCA code.
Regardless of the choice of code, there are a number of practical steps AIM companies will need to have followed to comply with the update to AIM Rule 26:
AIM regulation expects disclosures to be reviewed annually and details be provided on the date that the disclosures were reviewed. The regulation also expects that information on disclosures will be clearly presented and easily accessible from the AIM Rule 26 landing page.
Where applicable, companies should provide information on the relevant pages or sections of the annual report or the URL of the relevant webpage – for example, links to director biographies and details on committees. Additionally, companies may choose to disclose how they intend to improve current governance procedures.
AIM regulation also allows for the statement to contain a reference direct to the company’s annual report, provided that the material is freely available and the statement clearly indicates where interested parties can read or obtain a copy of that material.
It is important to note that the requirements under a chosen code are not set by the LSE and accordingly AIM companies should ensure that they are kept abreast of any changes to the recognised code that they have chosen to apply.
There is no one-size-fits-all approach to corporate governance. AIM companies must adopt a corporate governance code that implements policies and procedures they are readily able to maintain. There is no point in adopting a code that is not then going to be followed rigorously.
Good corporate governance involves more than just providing an explanation against its chosen code, it involves embedding a positive culture, strong leadership, robust systems and risk management. It is worth noting that the most appropriate code may be different to the ones mentioned in this article and the various options will need to be carefully considered with the board and its advisers.
“Companies must adopt a corporate governance code that they are readily able to maintain. There is no point in adopting a code that is not then going to be followed rigorously.”
This is not the end of current corporate governance reform. AIM companies will need to comply with additional reforms irrespective of their chosen corporate governance code for year-ends commencing on or after January 2019. These include, for example, the Companies (Miscellaneous Reporting) Regulations 2018, which requires a section 172 statement from the directors, CEO pay ratio disclosure and information on employee engagement.
With this particular area of regulation under an intensifying spotlight, the choice of code and the procedures put in place to maintain overall compliance with that code is crucial for all AIM companies.
The regulation in this area is only likely to increase, but by adopting a good and robust code of governance and practical policies to sit alongside it, a company can put itself in a good position to comply with the immediate, and all foreseeable future, requirements in achieving best practice corporate governance.