In recent months we’ve seen both the Financial Reporting Council (FRC) and the Quoted Companies Alliance (QCA) update their governance codes. You can read our reflections on the proposed FRC Corporate Governance Code changes here.
The purpose of the QCA Code is to provide a best practice governance framework that is suitable for smaller companies. It’s of particular interest to us as governance is one of the most common issues that we raise with firms in our B.E.S.T Sustainable Smaller Companies Fund.
The latest version of the QCA Code was published in April 2018. The Code can act as a valuable reference for growing companies wishing to follow good governance practice. It contains 10 corporate governance principles that companies should follow, and a step-by-step guide to how each principle should be approached. The QCA Code is less onerous than the full FRC equivalent: we view it as a good initial step for smaller firms thinking about governance standards for the first time. However, we’re also aware that the QCA is a membership organisation and, as such, has limited incentive to make its own Code too demanding for its own members.
The previous QCA Code had not been updated since 2013 and the latest iteration includes some changes and developments that we view as being particularly positive. A notable area of development in the Code concerns social responsibilities and culture. There is now greater focus on wider stakeholder relationships. Additions to the Code encourage smaller companies to integrate social issues into their business model wherever the company’s societal impact has the potential to affect the company’s long-term strategy. As part of applying this principle, the Code asks that companies explain how stakeholder feedback on social issues is sought and the resulting suggestions applied.
The Code has also strengthened its guidance on culture. The update requests that management promote ethical values and behaviours and this should be evidenced in reports and statements. We believe the “tone from the top” is very important and this change will help to ensure that good business ethics are fostered throughout the smaller organisations that follow this Code.
This revision by the QCA Code has come at a good time: the London Stock Exchange has changed AIM rules to mandate all AIM companies to apply a recognised corporate governance code and publish an explanation of how they do so from September 2018. A “recognised corporate governance code” could include either the new QCA Code or the FRC UK Corporate Governance Code. Whilst Castlefield recognise that the new QCA Code has an important role in the development of governance within growing companies, we are of the view that all companies, regardless of market cap, should aim for the principles outlined in the full FRC Corporate Governance Code. We seek to apply this approach to companies regardless of capitalisation as we feel that the additional strategic benefits offered by adherence to the FRC Code can benefit all shareholders. In addition, we regularly encourage AIM listed companies to take early action on corporate governance so that they are well-placed to meet the demands for improved governance standards that will come as the company grows.
By Kate Hewitt and Ita McMahon