By 28 September 2018 all AIM companies will need to have posted on the Rule 26 section of their website details of which corporate governance code they follow, a narrative description of how they apply the principles of that code, and an explanation for any departures from its specific provisions. The website statement will need to be updated annually.

The statement should reflect the up to date position at the date when it is published – not the position at the company’s last year end. AIM companies therefore need to review their corporate governance arrangements, and will need to identify (and may want to address) any areas of non-compliance, between now and the September deadline.

New AIM Rules

Under changes to the AIM Rules for Companies introduced in March this year, from 28 September 2018 the information that an AIM company must keep on its website under AIM Rule 26 will have to include:

  • Details of a “recognised” corporate governance code that the board of directors of the company has decided to apply.
  • How the company complies with that code.
  • Where the company departs from that code, an explanation of the reasons why.
  • The date on which the above information was last reviewed.

These disclosures are likely to become known as a “corporate governance statement”.

The London Stock Exchange has not published a list of corporate governance codes that it recognises. However, it seems clear that the Exchange recognises both the QCA Corporate Governance Code published by the Quoted Companies Alliance (QCA Code) and the UK Corporate Governance Code published by the Financial Reporting Council (UKCGC). Most AIM companies already report against one of these two codes. AIM companies that want to (or continue to) report against another code, such as a code published in a country outside the UK where they were incorporated, should discuss this with their Nomad and, if necessary, ask the Exchange to confirm that it recognises their chosen code.

Since 30 March 2018, all companies applying for admission to AIM have had to state in their admission document which corporate governance code they intend to follow. Like other AIM companies, recent joiners will need to put a corporate governance statement on their website by 28 September 2018.

Applying the QCA Code

The 2018 version of the QCA Code sets out in Section 3 ten Principles of good corporate governance. Companies are expected to report on how they have applied these Principles. For example:

  • Under Principle 4, a company is expected to “embed effective risk management, considering both opportunities and threats, throughout the organisation” and to include in its annual report a description of how the board has done this, including what the board does to identify, assess and manage risk and to satisfy itself that the risk management and related control systems in place are effective.
  • Under Principle 5, “the board should have an appropriate balance between executive and non-executive directors and should have at least two independent non-executive directors”; “the board should be supported by committees (e.g. audit, remuneration, nomination) that have the necessary skills and knowledge to discharge their duties and responsibilities effectively”; and “directors must commit the time necessary to fulfil their roles”. Companies are expected to identify in their annual report those directors who the board assesses to be independent, and any justification needed for this assessment; and to include details of the number of meetings of the board (and any committees) during the year, together with the attendance record of each director.

Disclosures can be made in the company's annual report, website or a combination of both, and the QCA Code specifies recommended locations. Companies are also expected to explain, “in a clear and well-reasoned way, any areas in which the company’s governance structures and practices differ from the expectations set by the QCA Code”.

Sections 2 and 4 of the QCA Code set out additional guidance that is designed to help companies apply the QCA Code. The guidance covers, among other things, the role of the chairman, senior non-executive director, non-executives generally and the company secretary. However, companies do not have to report on the extent to which they have followed this guidance.

The 2018 version of the QCA Code was published on 25 April 2018. A large number of changes were made to the previous version, which was published in 2013. Companies that want to report against the QCA Code should use the 2018 version in respect of financial years that begin after 25 April 2018. For example, a company with a 31 December year end would report, in the first half of 2019, on how it has applied the 2013 version of the QCA Code during the year ended 31 December 2018; and would report, in the first half of 2020, on how it has applied the 2018 version of the QCA Code during the year ended 31 December 2019.

Applying the UKCGC

The current version of the UKCGC consists of Principles (main and supporting) and more detailed Provisions. Premium segment companies are required by the Listing Rules to include in their annual report (i) a narrative description of how the company applied the Main Principles over the last year; and (ii) a statement as to whether the company complied with all “relevant” Provisions during the year and, if not, an explanation for the departure.

The UKCGC recognises that smaller listed companies, in particular those new to listing, may find some of the Provisions of the UKCGC disproportionate or less relevant. A few of the Provisions of the current version of the UKCGC do not apply to companies below the FTSE 350, although the FRC has proposed to remove this distinction.

AIM companies that choose to apply the UKCGC usually report on compliance as if they were a premium segment company below the FTSE 350, but they sometimes choose to depart from Provisions of the UKCGC that they consider inappropriate for a company of their size and stage of development. Sometimes they explain the reasons for such departures.

What AIM companies need to do

We recommend that all AIM companies consider the following:

  • Review which corporate governance code they want to report against. Companies will no longer be able to say that they apply the UKCGC (or the QCA Code) “so far as appropriate for a company of our stage and stage of development”, or something similar. Instead, companies must select the code they intend to apply and, if they consider that certain aspects of that code are inappropriate, they must identify each detailed provision that the company departs from and explain why. Some companies may therefore decide that from now on they would prefer to report against the QCA Code which, particularly in the 2018 version, has a greater focus on principles and fewer specific provisions to comply with.If the company wishes to report against a code other than the UKCGC or QCA Code, it should discuss this with its Nomad and, if necessary, check that its preferred code is recognised by the Exchange.
  • When a company posts its Rule 26 corporate governance statement on its website between now and 28 September, the statement should reflect the up to date position – not simply the position at the last year end. As a result, although the last annual report can be used as the starting point for the new Rule 26 corporate governance statement, the company will need to update it to reflect any changes in its corporate governance arrangements since the year end. In particular, a company should include details of progress made to address any gaps in its corporate governance arrangements that were identified in its last annual report or any recent admission document. Where the company wants to be able to report by 28 September 2018 that it complies with all the provisions of its chosen code, or with a particular provision that it has not previously complied with, it may need to accelerate efforts to address any such gaps between now and then.

    We understand that Nomads will be asked to confirm to the Exchange by 28 September 2018 that all their AIM company clients have complied with the new Rule 26 requirements.

  • Consider whether there are any other “messages” relating to corporate governance that the company wishes to convey via the Rule 26 corporate governance statement, particularly if they relate to an issue that was not covered in the last annual report. For example, the company could include information about measures the company is taking to improve board diversity or any gender pay gap; board succession planning; executive remuneration; or key risks that the company faces and the systems and controls it has in place to mitigate them.

Companies that, by 28 September 2018, will not have published an annual report since joining AIM

For a company that by 28 September 2018 will not have published a set of annual reports and accounts since joining AIM, more work will be required to put together a Rule 26 corporate governance statement because they will not be able to use their previous annual report as a starting point. In effect, such companies will need to bring forward the process of drafting a statement on how the company applies its chosen corporate governance code, and why any departures from it are justified, from the time when such a statement would otherwise have been prepared as part of the next annual report.

(In most cases, such companies will not simply be able to reproduce or link to the corporate governance section in their admission document because the amount of information provided there is unlikely to be sufficient. However, this section of the admission document could provide a starting point for drafting the Rule 26 corporate governance statement.)

Annual review of the corporate governance statement

Going forward, the corporate governance statement on the company’s website must be reviewed annually and the website must specify when the statement was last reviewed. In most cases, a company will therefore be able to comply with this ongoing obligation by ensuring that the statement on its website reproduces or links through to the latest annual report, provided that the annual report details areas of non-compliance (which, as noted above, at the moment is not required as a company can simply state that it complies with the relevant code “as appropriate”). There is no obligation to update the corporate governance statement for any changes that occur during the year, although a company should of course consider at the time any such change occurs whether it should be announced under the AIM Rules or the Market Abuse Regulation.

Future developments

Changes to the UKCGC

The Financial Reporting Council (FRC) is currently consulting on proposed changes to the UKCGC. The new version of the UKCGC, which will be shorter and more concise, with 17 Principles and 41 Provisions, is expected to be published on 16 July 2018 and apply to accounting periods beginning on or after 1 January 2019. Further details can be found here and (in relation to executive remuneration) here.

Engagement with stakeholders: additional reporting requirements for larger companies, including subsidiaries

As part of efforts to improve corporate accountability, the Government is proposing to introduce legislative changes to require certain larger companies to disclose additional information about how they have engaged with stakeholders and taken their interests into account:

  • Section 172 statement by large companies: All “large” companies will have to include a statement in their strategic report as to how the directors have had regard to the interests of stakeholders and certain other matters when complying with their duty under section 172 of the Companies Act 2006 to promote the success of the company (to be known as a “section 172 statement”). In particular, companies will be expected to explain how they have engaged with stakeholders and taken their interests into account when the board has taken key decisions over the past year. The FRC is expected to publish guidance as to the types of disclosures that companies are expected to make. The section 172 statement will also have to be published on a website.

A large company is expected to be defined as one that meets two out of three of the following criteria: (i) turnover of more than £36 million; (ii) balance sheet assets of more than £18 million; and (iii) more than 250 employees. Each company in a group that qualifies as large will have to produce a section 172 statement: consolidated reports for groups are not permitted.

  • Stakeholder engagement disclosures by large companies: The directors’ report will have to include a statement summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others and how such stakeholders’ interests have affected the company’s strategy and approach.
  • Employee engagement disclosures by companies with over 250 employees: Companies with more than 250 UK employees (calculated on a group basis, for parent companies) will have to disclose in the directors’ report how the directors have engaged with employees, how they have had regard to employee interests, and how employee interests have affected the company’s strategy and activities.

These legislative changes are expected to be introduced in the latter part of 2018 and apply to financial years beginning on or after 1 January 2019. This timetable is intended to align with the new version of the UKCGC. The first actual reporting under the new rules is therefore expected to start in 2020.

AIM companies will need to assess whether they or any of their subsidiaries are “large”, or have sufficient employees, to be caught by the new requirements. If so, the AIM company or relevant subsidiary will need to include the additional information in its annual reports for financial years beginning on or after 1 January 2019 and, as a consequence, between now and then it will need to start preparing for the new requirements: for example, by putting in place or regularising existing arrangements to engage with employees, customers, suppliers and other stakeholders.

Reporting on corporate governance arrangements in very large unquoted companies, including subsidiaries

All unquoted companies that have either:

  • more than 2,000 employees; or
  • turnover of more than £200 million and balance sheet assets of more than £2 billion,

will have to include in their annual report information about which corporate governance code (if any) the company applied during the year; how the company applied that code; and, if the company departed from the code, its reasons for doing so. If the company did not apply any code during the year, the statement must explain the reasons and what corporate governance arrangements were applied. The statement will have to be made available on a website for at least a year.

As the QCA Code and the UKCGC are not suitable for most unquoted companies, a group of corporate governance experts led by James Wates recently published a draft set of Corporate Governance Principles for Large Private Companies that unquoted companies will be encouraged to apply. The draft Wates Principles consist of six high-level and largely uncontroversial principles, each of which is supported by non-exhaustive guidance designed to help companies apply the principle in practice. The Government envisages that a company will provide a short supporting statement for each principle, explaining how it has been applied to achieve better corporate governance. The final version of the Wates Principles is expected to be published in December 2018 and is expected to become the default corporate governance code for very large unquoted companies.

A few AIM companies may have a subsidiary that is large enough to satisfy the criteria above. Where this is the case, the directors of the subsidiary will need to decide whether it should report against the Wates Principles (or another suitable corporate governance code) and, if so, how much information the subsidiary should include in its annual report about its corporate governance arrangements.

For background to these proposals see the LawNow article published on 12 December 2016, “Government consultation on strengthening the voice of employees and other stakeholders in large companies and improving corporate governance in large unquoted companies”.