Recent Corporate Governance Developments
Recently both the Financial Reporting Council (FRC) and the Quoted Companies Alliance (QCA) have published revised versions of their respective corporate governance codes.
The 2024 edition of the UK Corporate Governance Code, which is published by the FRC and applies to companies with a premium listing on the UK’s Official List on a “comply or explain” basis takes effect in January 2025.
The QCA Corporate Governance Code (QCA Code), which is published by the QCA, has been reviewed and updated by the QCA and the revised version was published on 13 November 2023 (2023 QCA Code). The 2023 QCA Code will apply to financial years beginning on or after 1 April 2024.
Looking in more detail at the 2023 QCA Code:
2023 QCA Code – Guidance for Growing Companies
Background and purpose
Five years since the existing 2018 version (2018 Code) was published, the QCA published a revised version of the QCA Code on 13 November 2023.
The QCA Code is designed to help growth companies operate better for their internal and external stakeholders by providing companies with the tools to achieve good practice. The 2023 QCA Code places greater emphasis on corporate purpose, environmental and social impacts, risk management, the function and make-up of the board and corporate communications. The QCA Code is established as the benchmark for the majority of smaller quoted companies. It is a principles-based code, rather than prescribing a particular form of governance. It gives companies the flexibility to choose the right approach for their individual circumstances; including their board and business strategy. Where a company chooses not to apply, or is unable to apply a particular principle of the QCA Code, it may provide its reason(s) for not doing so.
Application
The AIM Rules require applicable companies to include on their website details of a recognised corporate governance code that the board of directors has decided to apply, how the company complies with that code, and where it departs from its chosen corporate governance code an explanation of the reasons for doing so. This information should be reviewed annually and the website should include the date on which this information was last reviewed.
The 2018 Code has been applied by almost 900 companies, whose shares are traded on AIM (93%), the Main Market, the Aquis Stock Exchange and by private companies which may opt to float in the future.
Implementation timing
The 2023 QCA Code will apply to financial years beginning on or after 1 April 2024 with the first disclosures expected in 2025. There will be a 12-month transition period from 1 April 2024, where relaxations will apply whilst companies adjust to the changes introduced by the 2023 QCA Code.
Where to find the 2023 QCA Code
The 2023 QCA Code is available to download for QCA members (free) and for non-QCA members (at a cost of £450).
2023 QCA Code – updated principles
The 2023 QCA Code has preserved the ten broad principles which underpin it. The principles focus on the medium to long term value for shareholders without restricting the entrepreneurial spirit behind the company. Note the key updates highlighted below:
- Principle 1 – establish a purpose, strategy and business model which promote long-term value for shareholders.
- Principle 2 – promote a corporate culture that is based on ethical values and behaviours.
- Principle 3 – seek to understand and meet shareholder needs and expectations.
- Principle 4 – take into account wider stakeholder interests, including social and environmental responsibilities, and their implications for long term success.
- Principle 5 – embed effective risk management, internal controls and assurance activities, considering both opportunities and threats, throughout the organisation.
- Principle 6 – establish and maintain the board as a well-functioning, balanced team led by the chair.
- Principle 7 – maintain appropriate governance structures and ensure that individually and collectively the directors have the necessary up-to-date experience, skills and capabilities. Note: this revised principle combines 2018 Code principles 6 and 9.
- Principle 8 – evaluate board performance based on clear and relevant objectives, seeking continuous improvement.
- Principle 9 – establish a remuneration policy which is supportive of long-term value creation and the company’s purpose, strategy and culture. Note: this is a new principle, which reflects previous QCA guidance published in 2000.
- Principle 10 – communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other key stakeholders.
QCA Code 2023 – key changes
Corporate culture and purpose (Principles 1 and 2)
Principles 1 and 2 place greater emphasis on a company’s corporate purpose and culture. Companies are expected to articulate and disclose clearly what their corporate purpose is and the nature of their culture and how this is monitored by the board.
Shareholder needs and expectations (Principle 3)
The 2023 QCA Code encourages companies to consider putting in place a relationship agreement where the company has a controlling shareholder, eg, one holding 30% or more of the votes able to be cast at a general meeting of the company, in order for the company to better protect minority shareholders as well as improve transparency and accountability.
Stakeholder interests and environmental and social issues (Principle 4)
Increased focus is placed on “the workforce” as a key stakeholder of the company.
Environmental and social issues should be integrated into the company’s strategy.
The company's website should outline responsibility for stakeholder engagement and how feedback from such engagement is delivered to the board.
Companies should ensure that their practices towards employees are consistent with their individual values and introduce appropriate feedback systems to allow staff to raise and report issues and feel supported.
Risk Management: internal controls (Principle 5)
In line with the leading theme in the FRC’s revised UK Corporate Governance Code 2024, the 2023 QCA Code places greater emphasis on a company’s internal controls and assurance processes in establishing and supporting effective risk management.
Companies should now integrate into their risk management framework any climate-related risks and opportunities.
Board composition (Principles 6 and 7)
Updates to Principle 6 reflect the 2018 Code guidance on board independence. More specifically:
- at least half of the board should be independent non-executive directors, with a minimum of two such persons in total
- key committees of the board should comprise a majority of independent non-executive directors and the board should ideally aim for full independence, and
- all directors should submit themselves for election/re-election on an annual basis
The 2023 QCA Code outlines a new non-exhaustive list of indicators of independence that the board should consider when determining board independence including: a director's shareholding, length of tenure, commercial relationships with company and/or incentive arrangements.
Principle 7 requires boards to have the requisite skills to discharge their duties and responsibilities including in relation to matters of cyber security, emerging technologies, and climate change.
Succession planning (Principle 8)
Emphasis has been placed on the importance of succession and contingency planning. Principle 8 has been extended to cover the absence of key members of staff. No member of the board should become indispensable and board membership should be periodically refreshed.
Annual reports and accounts should now disclose a company’s succession plan and should outline indicative timelines for expected appointments.
Remuneration (Principle 9)
This new principle encourages/recommends companies to:
- establish an effective renumeration policy
- ensure that pay structures for senior management are easy to understand and align with shareholder values
- ensure the annual remuneration report and remuneration policies are (at least) put to an advisory (non-binding) shareholder vote, and
- ensure shareholders are able to vote on new or material changes to existing employee share plans or long term incentive plans
Communication with shareholders (Principle 10)
The chair’s corporate governance statement continues to play a vital role in the company ensuring strong communication with its key stakeholders in addition to its shareholders.
Emphasis is placed on the importance of reporting on sustainability matters.
2023 Code “Badge”
Anyone that has bought a copy of the 2023 QCA Code can take advantage of the QCA’s trademarked “QCA Code Bade” to display on their company website or in their annual report. QCA members which apply the 2023 QCA Code are automatically entitled to display the badge. The QCA’s intention is that the badge becomes a recognisable mark for investors, governance experts, the media and wider stakeholders.