Comply or Explain - how adopting a recognised Corporate Governance Code has impacted Natural Resources companies
30 April 2019
Back in the first quarter of 2018, the AIM rules were amended to require all AIM companies to disclose on their website which recognised Corporate Governance Code (‘Code’) they had chosen to apply. Companies were given six months lead time to the requirement becoming effective, on 28 September 2018. Under the requirements of the AIM rules, the rule change required companies to adopt a ‘comply or explain’ stance on the extent of the adoption of the Code they chose to apply.
The AIM rules did not prescribe a list of recognised Codes which companies may have chosen to adopt. This flexibility allowed AIM companies to adopt a Code which was appropriate to their stage of development, sector and size. However, the Exchange did make reference to both the QCA Corporate Governance Code and the UK Corporate Governance Code as benchmarks but it was not prescriptive on which, if either, should be adopted.
As many companies are now reaching the end of their first reporting season, it seems helpful to take a snapshot of which Codes companies have adopted in practice, as well as further consider whether the requirement to publish the Code applied and the extent to which a company has ‘complied or explained’ has been of use to users of financial statements.
Our Natural Resources clients have mostly adopted the QCA Corporate Governance Code. This is not unexpected. Some of the larger AIM companies have adopted the UK Corporate Governance Code but there is a clear preference for the QCA Corporate Governance Code.
Whilst the AIM rule change in itself did not require disclosures regarding the adopted Code in the annual report, the two most commonly adopted Codes (the QCA and the UK Corporate Governance Codes) do require some annual report disclosure. In the first quarter of the 2019 reporting season for companies we have seen:
- Many AIM Natural Resources companies took the opportunity of the rule change to review whether any previously adopted or partially adopted Codes were appropriate to their current business structure, shape and size. Where they were viewed as not, companies have taken the opportunity to change the Code adopted. The relative simplicity of the QCA code is seemingly more attractive in a comply-or-explain regime than the perception of less flexibility attached to the UK Corporate Governance Code. The QCA note themselves that, where companies have actively considered and concluded on a change in Code, this should be seen by shareholders and users of the financial statements as a positive step in the evolution of corporate governance for the AIM market.
- As many of our Natural Resources AIM clients have adopted the QCA Corporate Governance Code, they have included, for the first time, disclosures around their compliance with the QCA Code or have taken steps to significantly improve previous disclosures in their Annual Reports, following the application of the new rule. Again, this is a positive step towards increasing the insight shareholders and users of the financial statements have into the interactions of the Execs and Non-Execs, the workings of Remuneration, Nomination and Audit Committees and the governance tone set within the business.
Overall, in our view, the change to the AIM rules requiring AIM companies to adopt and report on a recognised Corporate Governance regime is providing an incentive to AIM companies to revisit their overall approach to Corporate Governance. This is being welcomed by both directors and investors alike. The challenge now is for companies to keep up the momentum for continual improvement of their governance regime.