On 30 March 2018 new versions of the AIM Rules for Companies (AIM Rules) and AIM Rules for Nominated Advisers (Nomad Rules) came into force.
The new AIM Rule 26, which applies from 28 September 2018, requires AIM companies to provide details on their website of the ‘recognised corporate governance code’ that the company has decided to apply. You’ll also have to state how your company complies with that code and where it departs from it, including an explanation of the reasons for doing so. The information should be reviewed annually and the date it was last reviewed should be included.
Until now, such disclosure has been voluntary and whilst there is purposefully no prescribed list of recognised codes, AIM companies are likely to adopt either the recently updated QCA Corporate Governance Code or the UK Corporate Governance Code, which was published by the Financial Reporting Council (FRC) in its revised form on 16 July 2018, following a consultation earlier this year.
The Quoted Companies Alliance’s (QCA) research indicates that over 50% of the 900+ companies on AIM refer to the QCA Code, but that there is also “a significant minority of AIM companies that currently do not apply any code”.
The revised UK Corporate Governance Code
The revised Code entails the biggest shake up of its content in recent years and is the result of a comprehensive review to ensure the Code remains fit for purpose.
The revised, ‘sharper’, and more concise Code re-focusses on the application of the Principles, with particular emphasis on stakeholders, integrity, corporate culture and diversity. It is divided into five sections (with slightly different headings from the current five Code sections):
- Board leadership and company purpose.
- Division of responsibilities.
- Composition, success and evaluation.
- Audit, risk and internal control.
There are 18 Principles for companies to apply contained within the five sections of the revised Code. The current section entitled ’Relations with shareholders‘ is integrated into the five sections above to emphasise the importance of shareholder engagement. Supplementing the Principles are the Provisions, which set out good practice for companies to meet and which operate on a ‘comply or explain’ basis.
The FRC's ‘Guidance on Board Effectiveness’, published in 2011, has also been rewritten to support the revised Code. Some aspects of the current Code, for example the induction of new directors and the role of the nomination committee, have been moved to the Guidance. This does not lessen their importance but reflects a view that such practices are now seen to be well embedded in board behaviours. The revised Guidance also contains some practical information in certain areas, such as:
- questions for boards in relation to remuneration, workforce engagement, and decision-making;
- questions for remuneration committees;
- relations with the workforce and wider stakeholders, including suggestions of workforce engagement activities.
The revised QCA Corporate Governance Code
The revised QCA Code, which was published in April by the Quoted Companies Alliance, aims to be a practical, outcome-oriented approach to corporate governance tailored to the needs of small and mid-size UK quoted companies. The QCA Code includes 10 corporate governance principles that companies should follow, step-by-step guidance on how to apply these principles effectively and guidance on how to disclose them with clarity and transparency. The principles will need to be applied by boards and explanations provided as to the practices used to apply them.
One of the key differences between the two Codes is that the Provisions of the UK Corporate Governance Code are based on the principle of ‘comply or explain’ whereas the QCA Code is built wholly on the principle of ‘apply and explain’. The latter allows boards to more easily adhere to or depart from the principles in the circumstances of their own organisation, provided that a “well-reasoned explanation” is disclosed. There is, however, a revised emphasis in the new UK Corporate Governance Code on the application and explanation by companies in how they meet the revised Principles.
The intention of the ‘apply and explain’ approach is to shift the focus of organisations from a compliance mind-set to a qualitative mind-set to help organisations give effect to each of the outcome-based principles.
What directors should consider
You’ll now have to determine which Code to publicly follow and use this as an opportunity to reconsider, revise and improve your general corporate governance policies and procedures. This is to ensure that they’re fit for purpose and will stand up to the inevitability of the enhanced scrutiny from stakeholders that the rule changes entail.