The QCA issues a new governance code for growth companies

Updated but still flexible and proportionate

In November last year, the Quoted Companies Alliance (QCA) released a revised Corporate Governance Code providing a flexible set of principles for small to mid-sized growth companies to help them ‘run better’. 

Presently, the Code is embraced by almost 900 companies. This includes 93% of businesses listed on AIM, a significant number of Main Market entities, three-quarters of the companies trading on the Aquis Stock Exchange, and private firms considering future public listings.

The new Code applies to financial years beginning on or after 1 April 2024, although the QCA recommends that companies start to migrate to the new Code now.

The Code was last updated in 2018 and the QCA felt it was appropriate to take a fresh look at it. A consultation with stakeholders found that they wanted a code that placed greater emphasis on corporate purpose, environmental and social impacts, risk management, the function and make-up of the board and corporate communications, but which maintained its core principles-based structure. This is what the QCA set out to deliver. 

In revising the Code, the QCA has not ‘sought to reinvent the wheel’ and the core tenets of flexibility and proportionality that underpinned previous versions remain in place.

Nevertheless, it recognises that governance is ‘a dynamic concept’ and needs to keep pace with market expectations, particularly in environmental, social and governance practice areas, as well as internal controls.

The QCA has stated that the aim of the new Code is to:

• Improve and simplify the Code’s structure and flow.
• Reflect new responsibilities for board members and executives in areas such as ESG.
• Address key issues highlighted in the consultation.
• Incorporate key feedback from stakeholders.
• Add to application guidance.

The 2023 Code continues to be structured around ‘10 Principles of Corporate Governance' and is divided into three themes:

1. Deliver growth;
2. Maintain a dynamic management framework; and
3. Build trust

The main changes, and the impact on what companies have to publish in the Annual Report and online, can be summarised as follows:

• A greater emphasis on corporate purpose and culture, and an expectation that companies clearly articulate what these concepts mean to them. (Principles 1 and 2)
• Ensure proactive engagement with shareholders on governance matters and more granular disclosure of stakeholder engagement in the Annual Report. (Principle 3)
• Extra reporting around risk including the identification, assessment and management of risk. (Principle 5)
• More detailed disclosure of board composition, particularly regarding its independence, diversity, skills and experience. (Principle 6)
• Disclosure of how the necessary updating and development of directors’ knowledge and skills is achieved to discharge their duties regarding such emerging challenges as cyber security and climate change. (Principle 7)
• Disclosure is expected of the board performance review process, plans for external review and succession planning, including timelines for any expected appointments. (Principle 8)
• The corporate governance statement should include commentary on the challenges experienced in the year and how they were addressed by the board and/or through governance changes. (Principle 10)
• The chair's corporate governance statement remains a key part of a company’s communication and it is expected to include additional disclosures such as the alignment of corporate governance practice with purpose, the outcomes of key governance-related developments, how the company's approach to governance ensures an effective board and the evolution of governance arrangements and practices. (Principle 10)

As with the FRC’s UK Corporate Governance Code, application of the QCA Code is on a comply or explain basis, a position reinforced for AIM-listed companies by the requirements under AIM Rule 26 to publish such details online. 

The FRC looks to raise standards through the publication of an annual Review of Corporate Governance Reporting, showcasing examples of high-quality and insightful reporting, and expects companies, their advisers and stakeholders to consider the Review and act upon it accordingly.

Currently. the QCA does not produce a comparable review of performance against its Code. As a small, not-for-profit organisation, it understandably doesn’t have the resources to do so. Instead, it is for investors and other stakeholders to make a judgement on the adequacy of individual companies’ disclosures and practices. 

The Code’s full text and accompanying guidance is available online, at the cost of £450. This may not be a significant sum for the companies who adopt and apply it, and QCA membership comes with other significant benefits.

But companies applying the Code are not the only interested parties. Other stakeholders and audiences care about how a company is run. If they are to make a judgement on whether it is ‘run better’ than others, it would help them to have easier access to the governance principles that a company says it applies. If a way could be found to make the Code freely available, it would benefit all.