A key argument that can be made in favour of this change is that it offers greater protection for retail shareholders. AIM companies frequently have a large retail shareholding base. Retail shareholders are not as powerful as institutional investors so establishing a standard of corporate governance in AIM companies and a level of disclosure in the Annual Report and corporate website empowers retail investors.
However, there are a number of factors that suggest that the mandatory compliance with a corporate governance code may not necessarily be the best idea.
According to data released by the London Stock Exchange, the majority of AIM companies are very small, with 61% of AIM companies have a market capitalisation lower than £50 million and 44% of AIM companies have a market capitalisation lower than £25 million. For comparison, 82% of Main Market companies have a market cap over £50 million. By requiring all AIM companies to apply a corporate governance code, it adds to the regulatory burden, which will have a much bigger impact on AIM companies than Main Market companies. Additionally, there tends to be a better alignment of interests between investors and the board of a small-cap AIM companies compared with Main Market companies. The board will own a relatively large stake in their company and are incentivised to make sure the company performs well.
AIM is for growth companies. Therefore, it could be argued that value for shareholders is more likely to be preserved and generated through management concentrating on business operations, rather than compliance with a corporate governance code. While it is likely that large AIM and Main Market companies are likely to fail due to governance issues, small AIM companies are likely to be risky business ventures for reasons other than governance.
AIM companies require flexibility in the way they operate, due to the great differences between AIM companies. A level of flexibility is offered in the AIM rules, as AIM companies can choose which governance code they apply. The issue with this is that there are not many choices. The only well-known corporate governance codes are the Quoted Companies Alliance and Financial Reporting Council codes. However, the creation of more corporate governance codes would not be a great solution, as it would mean that investors would then need to be familiar with a large number of corporate governance codes, in order to properly assess the governance of companies.
A potential alternative solution is to improve the disclosure of governance at AIM companies without prescribing what rules to follow. This could be done by providing AIM companies with a list of open-ended questions about governance that they should aim to address in their corporate governance statement. This would ensure investors would have a good understanding of the governance of the company, which they can then judge whether they think the governance of the company is acceptable or not. It would also allow AIM companies flexibility.
Some potential open-ended questions could be:
Jones and Palmer believe that communications around governance should not be solely focused on adhering with corporate governance codes, but also include engaging content that allows investors to get a deep understanding of the governance of a company in both policy and practice.
If you would like to know more about changes to the AIM rules, get in touch!