Good performance goes hand in hand with good corporate governance

31st May 2018

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As we await the result of the Financial Reporting Council’s overhaul of the UK Corporate Governance Code, it is worth noting that change will not just be restricted to companies listed on the main market. From September, smaller companies listed on AIM will also be required to apply a recognised corporate governance code for the first time.

However, most small and mid-sized companies are likely to find the FRC’s UK Corporate Governance Code unsuitable to their size and stage of development. In fact, research indicates that around 400 companies on AIM currently refer to the Quoted Companies Alliance (QCA) Corporate Governance Code, which is specifically tailored for companies at the smaller end of the market cap spectrum. It includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to effectively apply these principles and adopt best practice.

At Downing, we expect our investee companies to apply rigorous and effective corporate governance and have directors who understand their duties and are familiar with their legal responsibilities. These can be demanding – directors are accountable for the culture, foresight, and success of the company, and must act in the best interests of the company to benefit current and future shareholders.

Competent boards should be regular constructive challengers to management teams. They should also help develop strategy and long-term objectives, monitor performance, ensure the build-up of necessary assets, skills and capable management, and lead in setting a culture of integrity.

The crucial role played by good corporate governance is demonstrated by one of our holdings that have been less successful. We took a board seat, suspecting that governance could be improved, and quickly uncovered both bad governance and false accounting.

The structure of our investment has allowed us to drive change throughout the business. Board members and top management were changed, the business refocused and we now believe that the company should generate a gain for shareholders in due course.

Correct governance of companies is critical to corporate health and investor confidence. At the core of good governance is directors actively directing’, striving for the success of the company, overseen by nominated advisers who should be doing more than going through the motions, and by an FCA AIM team that should monitor with determination.

As the UK faces an uncertain future, good corporate governance will become ever more important, and will be a valuable contributing factor in creating and growing successful UK companies.

This article was written by Judith Mackenzie, Partner of Downing LLP and a QCA board member.

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